Welcome to one of the most exciting beats in business—at least at the moment. Wall Street aside, the workaday job of traditional banks had long been seen as staid and un-newsworthy, until banks of all sizes and in practically every geographic market got swept up in the latest crisis and started failing by the hundreds.
The banking beat encompasses a wide array of topics—some very specific to the industry (like bank regulation or lending trends) and some that involve the sector’s approach to more universal issues, like corporate governance reform, management succession, quirks of accounting, and changes in technology and consumer behavior.
In our lifetime, banking has never been a more political topic than it is now. It’s a great angle to explore; but take care not to lump in the First Bank of Wherever with the Bank of America and Citigroups of the world. The CEO at the First Bank of Wherever probably was getting paid a lot less than the infamous “fat-cat bankers” who were taken to task in 2008/2009, and his or her bank probably was not very involved in the esoteric market instruments that have been blamed in part for the downfall.
That said, beware the small-town banker who blames his or her troubles on everyone else. Many small banks were reckless in their own way, making loans in markets they did not understand, or investing in securities that they hoped would produce outsized returns, or lending to borrowers who had no business getting credit from anyone. There’s no better evidence of all the trouble at small banks than the wave of small-bank failures triggered by the crisis.
Although failures have slowed this year, they’re still occurring at a pace well above historical averages. The Federal Deposit Insurance Corp. (which supervises thousands of banks and provides the insurance that protects consumers from losing their deposits when a bank folds) shut down 61 banks in the first half of 2011. For a sense of the trouble still to come, consider that at the end of the first quarter of 2011, the FDIC had a list of 888 banks classified as “problem institutions.”
That’s the highest number since 1993, the Savings & Loan crisis era. Not all problem institutions will fail—and the FDIC never names names here—but an expansion or contraction in the number of banks on the problem institution list can help you gauge the general health of the industry.
It’s taken awhile for the financial shocks of 2008 to work their way through the economy. Some bankers are still playing a game of “extend and pretend,” hoping that distressed borrowers will recover enough to pay their obligations in full, when what the bank really ought to do is write down the value of the loan. But write-downs hurt the bottom line, so there is a natural tension in the way banks approach loan valuations.
Banks also are dealing with a much heavier regulatory burden. Regulators have stepped up their scrutiny, and a host of new rules have led to higher compliance costs.
Hundreds if not thousands of banks are expected to shut down in the next few years. The smallest banks, which will have the hardest time shouldering new compliance costs and the like, generally are believed to be the most vulnerable to failures or takeovers. Some owners may just decide to shut down their businesses as they approach retirement age. In any case, there are many factors that make it highly likely that banks in your town will go away or get acquired, and it’s always big news when a bank shuts down or a new owner enters the market.