Old is new
|Most banks are now returning to lending practices of 40 years ago.|
While only a handful of banks were directly responsible for causing the financial crisis a few years ago, every bank has had to deal with the fallout to a certain degree.
That's as true at the local level as it is nationwide. One result of the financial meltdown and subsequent recession is that many people just aren't borrowing money like they used to. That may be a good thing for over-leveraged consumers, but it's not necessarily good news if you're a banker who makes a living loaning out money.
“Consumer loan demand is nonexistent,” says Danny Montelaro, south Louisiana area president with Regions Bank. “Everybody's paying off debt.”
At the same time, banks are dealing with new regulations meant to head off a rerun of the crisis, most notably the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, widely considered the most significant package of financial reform since the period immediately after the Great Depression. New costs brought by new regulations have led banks to question how they should do business in this new environment, although the answers they find will vary by institution.
“Each bank will address the host of issues promulgated from D.C. as best they can,” says Robert Taylor, CEO of the Louisiana Bankers Association. “There is no one way to respond.”
Rajesh Narayanan, an associate professor of finance at LSU, points to two important regulatory changes. He says Dodd-Frank established new accounting rules that forced assets that banks had securitized onto their balance sheets. Also, he says the 2009 Credit CARD Act curtailed credit card fees and interest rate hikes.
“The natural response for most banks is to basically re-evaluate their portfolio to see what they can do to counter these trends,” Narayanan says.
The first response in the midst of the crisis was to cut way back on consumer loans by greatly tightening lending standards. Now, banks are opening the consumer lending spigot a bit, but are moving into products where they feel they can make higher margins, he says.
Some large, traditional lenders such as Wells Fargo or J.P. Morgan Chase are increasing the number direct, unsecured loans to their best customers, Narayanan says, but charging high interest rates. He sees this trend as a sort of throwback to lending practices of 40 years ago, where the local neighborhood banker lent money to people with standing in the community that he knew personally, even without specific collateral.
“Your reputation was your collateral,” he says.
Capital One, a credit card company that only jumped into retail banking in 2005 when it bought Hibernia, has gone in the exact opposite direction from the trend Narayanan mentions. In early March, Capital One Bank announced it would no longer offer unsecured, CD-backed and savings-backed loans in the Baton Rouge market. The bank says it will continue to offer mortgage loans, auto loans, equity loans and secured credit cards.
Capital One regional spokesman Patrick Mendoza says the discontinued loan products accounted for “a small part of our business” in the Baton Rouge area, and said customers who already have such loans would not be impacted.
“Leaders at Capital One have determined that the returns on this business are not sufficient to warrant the investment required to grow this business,” he says.
Retired LSU professor of banking and finance Willie Staats was somewhat surprised to learn about Capital One's decision, but says all banks are taking a fresh look at their portfolios in light of increased regulation.
“If a product isn't offering a decent margin, they're not going to offer it anymore,” he says. “Banks have two ways to go right now. One way is to simply charge more fees, which isn't very popular with customers, obviously. The other is to get more efficient, consolidate and find products they can specialize in.”
Montelaro's bank briefly tried instituting new fees. Following the lead of Bank of America, Regions began to charge a $4 monthly debit card fee last year in response to a new federal rule restricting how much bankers can charge retailers in debit card swipe fees.
“We heard from our clients that they didn't like [the fee] too much,” Montelaro says. “That lasted a few weeks, and we turned that off completely.”
But instead of cutting out certain types of loans, as Capital One has, Regions is attempting to broaden its customer base by reaching out to people who seldom, if ever, use a bank at all. According to a 2009 survey by the Federal Deposit Insurance Corporation, an estimated 9 million U.S. households are “unbanked”: that is, no one in the household has a checking or savings account.
Another 21 million or so households are thought to be “underbanked,” defined as having a checking or savings account but at least sometimes relying on alternative financial services such as non-bank money orders, check-cashing services or payday loans. A disproportionate number of unbanked and underbanked households are low-income and members of racial minorities, the FDIC says.
In March, Regions completed a company-wide rollout of its Now Banking services, allowing customers to cash checks with immediate funds availability, wire money, pay bills, and use prepaid, bank-issued Visa cards, even without a Regions Bank deposit account, and at a smaller cost than they might pay for the same services from non-banks. Customers will be invited to participate in a series of free online financial education courses.
“We're not looking to prey on anybody,” Montelaro says. “Banks have not looked at that [unbanked and underbanked] segment of the market.”
John D'Angelo, CEO of Investar Bank, says his community bank has never embraced the risk of unsecured lending, and has been very selective since the recession in making loans for non-owner-occupied real estate. He says increasing regulatory costs hasn't led them to discontinue or rein in specific products.
“What we're seeing right now is an opportunity to go out and merge with other financial institutions and create a powerhouse bank that has enough bulk to absorb these costs,” he says. “The more you can spread the costs across a bigger bank, the better off you are.”
Last year, Investar merged with Prairieville-based South Louisiana Business Bank. D'Angelo says Investar continues to look for logical partnerships, and hints that he might have more news to share on that front in the near future.
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