Reflections on the banking industry, post crisis

Tom Bengtson, Publisher

Ten years ago, a financial crisis was unfolding and the nation’s banks were vilified by populist politicians and media alike. Every story needs a villain and the story a decade ago was about mortgage foreclosures, job losses and collapsing equity markets; banks were the scapegoat.

Today, the economy is stronger, and banks are so restricted that Congress actually may pass regulatory relief legislation soon. The currency in the spotlight isn’t necessarily cash, but information – something many would argue is just as valuable. No longer are the banks on the hot seat: today it’s Facebook, the credit bureaus and other big purveyors of personal data. Just as Congress reacted to the 2008 financial crisis with the Dodd-Frank Act, I expect Congress will respond to careless data handling practices with far-reaching privacy legislation.

Reflecting on the span of history between 2008 and 2018, I make these observations:

1) Extreme partisanship neutralizes government. The Affordable Care Act was one of the biggest pieces of legislation passed in that decade. Enacted in 2010 when Democrats controlled Congress and the White House, the law was largely unraveled in 2017 when Congress and the White House, now in Republican hands, overturned the individual mandate. Because the country is divided ideologically – an arena of diverse ideas is healthy – lasting change can’t be a partisan proposition. An idea that doesn’t win support from both sides of the aisle will be overturned when the pendulum swings to the other end of the ideological spectrum.

2) Sometimes Congress misses the obvious. As far-reaching as the Dodd-Frank Act was, it completely missed a key point at the heart of the financial crisis: the wholesale mortgage market. In 2008, regulators took Fannie Mae and Freddie Mac into conservatorship, where they remain today. Dodd-Frank offered nothing in terms of improving the secondary market for mortgages. It was a huge missed opportunity.

3) The post-crisis environment was brutal on community banks. More than 500 banks failed in the decade. The total number of banks dropped to 5,258 at year-end 2017 compared to 7,683 at year-end 2007. Banks with fewer than $100 million in assets dropped to 1,407 compared to 3,440 banks 10 years earlier. Mounting regulatory burden, recession, super-compressed net interest margins and accelerated migration toward urban areas hurt many community banks.

The industry is better off in many ways – better capitalized, more efficient, and greater access to technology to improve the customer experience – than it was 10 years ago, but let’s not forget what we’ve come through. There are lessons in these reflections.

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