Banking Takes a Beating
By Stephen Koepp
COVER STORY
The money industry comes under attack from customers, rivals and regulators
American bankers for decades operated by the 3-6-3 rule: pay depositors 3% interest, lend money at 6% and tee off at the golf course by 3 p.m. They could afford to be that precise because federal and state laws set the strict rules by which they operated and protected them from competitors. As a result, the power and prestige of bankers remained as secure as their vaults, while profits were steady and certain.
Suddenly, all that is gone. Bankers now face their most strenuous survival test since the Great Depression. Everywhere they turn, bankers are becoming mired in swamps of controversy and competition. Consumers, who in the past accorded bankers blind trust, are rebelling against skyrocketing fees, poor service and impersonal treatment. Such marketing powerhouses as Sears, Roebuck and Merrill Lynch are now financial bazaars that have attracted thousands of bank customers with lucrative new services. As they became free of much federal regulation, banks began engaging in suicidal price wars. Because of poor management, overzealous lending and some bad luck, commercial bank profits have been battered.
The clearest example of the industry's chaos is the growing string of financial failures. Warns Economics Professor Lester Thurow of the Massachusetts Institute of Technology: "A threat to the soundness of our private banking system is an economic nightmare." So far this year, 71 banks have collapsed, compared with 48 in all of 1983 and only ten in 1981. The latest failure was the First American Banking Co. (assets: $22.7 million) of Pendleton, Ore., whose office reopened last week as a branch of a competitor from a neighboring town. Government regulators have put more than 800 of the 15,000 U.S. banks on their "problem list." Officials keep the names on the list a secret to avoid alarming depositors and aggravating the situation. In the most dramatic bank rescue to date, the Federal Government last summer pumped $4.5 billion into Chicago's Continental Illinois to save it from failure.
American consumers are increasingly concerned about the safety of their money in the bank. In a poll taken in July for American Banker newspaper, 36% of the people surveyed said their confidence in banks had fallen. According to Gallup polls, the percentage of Americans who profess a high degree of faith in bankers dropped from 60% in 1979 to 51% last year.
No doubt many consumers have been worried by a seemingly endless string of bad-news headlines about their banks. Says Val Adams, a marketing executive in Chicago: "The failures are just more proof that they don't know what they're doing, and that's kind of scary. I don't mean I'm going to take my money out and put it under my mattress, but I am concerned." Last week BankAmerica and First Chicago, two of the nation's largest institutions, said they were considering selling their landmark headquarters buildings. Reason: both banks must raise money to fulfill an order by federal regulators to build up their reserves against bad loans. Says First Chicago Chairman Barry Sullivan: "We're in a long-term competitive game. We've had some pretty good innings, and this is a bad inning."
U.S. bankers could once ignore consumers who lost confidence in their institutions as a disgruntled minority; today top executives fret openly about the problem. "There is nothing more important to us than to restore the public's faith," says Samuel Armacost, president of San Francisco's Bank America (assets: $121 billion). John McGillicuddy, chairman of New York's Manufacturers Hanover ($73 billion), concurs: "I think the confidence factor is the most serious issue we face. We haven't lost it completely, but it has eroded seriously."
Many banking experts contend that the present woes are temporary. Says Jack Whittle, chairman of the financial consulting firm Whittle & Hanks: "Banking is going into the free-enterprise system out of a protected environment, and that is bound to shake up a whole lot of things." The optimists believe that the financial industry will fight its way out of today's morass and become stronger than ever.
Indeed, the outlines of a new, potentially stronger one are already emerging. Many timid, superprudent banks have been pushed to innovation and aggressive marketing. Says John Medlin, president of North Carolina's Wachovia Bank ($8 billion): "You find more risk taking, more motivation and more financial entrepreneurship." Notes Leonard Weil, president of California's Mitsui Manufacturers Bank: ($1.7 billion): "Despite all the dark suits worn by its leaders, banking is a very dynamic industry." Bankers have rolled out dozens of new services ranging from discount-catalog shopping to home-equity accounts that allow consumers to write checks based on the value of their house or condominium.
In this atmosphere of frenetic competition, however, many banks are making serious mistakes. Says Charles Zwick, chairman of Miami's Southeast Banking Corp. ($9.2 billion): "Bankers are forced to take on new risks, and many of them are guessing wrong." The business has become a high-wire act for managers, leaving them little room for error. A study by the Arthur Andersen accounting firm estimates that the number of banks in the U.S. will drop from the present 15,000 to 9,600 by the end of the decade.
So far the turmoil has posed no significant risks for small depositors. When a bank collapses, the Federal Deposit Insurance Corporation reimburses them for up to $100,000 on their lost accounts. As it happens, about 500 U.S. banking institutions carry no federal insurance, and many of their depositors could suffer in case of failure. Nonetheless, says John S. Reed, chairman of New York's Citicorp ($145 billion), the largest U.S. banking company: "To the extent that we've had difficulties, the consumer has been very well protected." When Continental Illinois got into trouble, the Federal Government even guaranteed deposits of more than $100,000. Despite those pledges, nervous crowds often line up at teller windows and begin withdrawing their money when rumors start that a financial institution is in trouble.
Periods of turmoil are familiar in the history of banking. The big three banks of 14th century Florence, the Bardi, Peruzzi and Acciaiuoli, wielded great power until they failed after Edward III of England and King Robert of Naples defaulted on their debts. The fall of Austria's Creditanstalt in 1931 led to financial panic around the world and made the Great Depression worse. America's founding fathers put little faith in the stability of banks. Wrote Thomas Jefferson in 1816: "I sincerely believe that banking establishments are more dangerous than standing armies." Andrew Jackson, who never concealed his distrust of powerful moneymen, told a group of them, "You are a den of vipers and thieves. I intend to rout you out."
Throughout most of American history, bank failures occurred with dismal regularity, and consumers had no protection from them. Even in the booming 1920s, banks closed at the rate of about 500 a year. The failure rate rose sharply during the four years following the 1929 stock-market crash, when a total of 9,000 banks closed. With the entire financial system in shambles, President Franklin Roosevelt in March 1933 closed all the nation's banks for four days to quell the panic. Institutions declared sound by federal and state officials were reopened, and Congress began writing new banking laws. The resulting Glass-Steagall Act established the Federal Deposit Insurance Corporation to guarantee the safety of savers' money and banned banks from conducting the lucrative but risky business of underwriting securities.
Bankers at the time vociferously objected to federal regulation, but over the years they grew to enjoy the cozy protection it afforded. The business, wrote Martin Mayer in The Money Bazaars, became "a stuffy and oversocialized world, where lending officers got their jobs through family connections."
In 1963 Texas Democrat Wright Patman, then chairman of the House Banking Committee, antagonized financiers when he said, "I think we should have more bank failures. The record of the last several years of almost no failures is to me a danger signal that we have gone too far in the direction of bank safety." Big-city bankers bitterly opposed Patman's novel ideas for allowing more competition.
The financial world, though, soon began shifting underneath the bankers. Money-market mutual-fund accounts, for example, which were invented in 1971 by Wall Street Mavericks Bruce Bent and Henry Brown, offered interest rates of 8% or more at a time when passbook savings accounts at banks paid only 4 1/2%. In 1977 Merrill Lynch jolted bankers with its Cash Management Account, which combined stock brokerage with savings and checking accounts.
Consumers were initially reluctant to take their money out of traditional savings accounts, but bankers were offering such low rates that depositors soon came to realize they were missing out on substantial income. Before long, people began transferring cash from savings and checking accounts to money-market funds. Total deposits in those accounts jumped to $231 billion in 1982, when banks began winning some of it back by offering similar services. Says C. Todd Conover, the Comptroller of the Currency, a top federal banking regulator: "The public wants financial services, but it couldn't care less whether it gets them from banks."
Over the past five years financial powerhouses, including Prudential-Bache and Shearson Lehman/American Express, have become banks in everything but name. Said Walter Wriston, former Citicorp chairman: "The bank of the future already exists, and it's called Merrill Lynch." Three weeks ago, Equitable Life, the nation's third-largest insurer, joined the parade by paying about $432 million to buy the Wall Street brokerage firm Donaldson, Lufkin & Jenrette. Even industrial companies (General Electric, National Steel) and chain stores (K mart, Kroger) have plunged into consumer finance by buying banks or insurance companies. Thrift institutions too have moved in on commercial banks' territory. Deregulation has enabled savings and loans to offer such services as checking accounts and commercial real estate loans, which in the past had been solely the province of banks.
Many major bankers fear that by the end of the decade their toughest competitor will be Sears. The company has opened financial-service centers, where consumers can buy everything from fire insurance to stock options, in 300 of its 805 stores. Last month Sears announced plans to buy Greenwood Trust bank in Delaware, which will become the nucleus of its financial network. The Chicago-based retailer is also considering its own universal credit card. It could be used in non-Sears stores and would be competition for MasterCard and VISA, which are issued by banks.
Congress has given bankers some means to fight back. The Depository Institutions Deregulatory and Monetary Control Act, passed in 1980, has gradually abolished the limits on interest that bankers can offer savers. Before that law, they were restricted to paying a maximum rate of 5 1/4%. Banks are trying to win back depositors with accounts like Super NOW checking, which currently pays about 7%. The money in those accounts has grown from zero in 1982 to $46 billion.
Freedom has not been without its price. Since the new accounts offer attractive rates, consumers understandably have been moving money out of low-interest passbook accounts into higher-paying ones. Moreover, bankers have used their new freedom to offer whatever rates they want on most deposits, while engaging in often ruthless competitive battles for customers. When money-market accounts were launched in 1982, bankers in Atlanta staged a marketing war that briefly pushed annual rates as high as 21%. New York City's major banks engaged in a skirmish last summer that sent interest rates on certificates of deposit almost two percentage points over the national average of 11 1/2%.
Those higher rates, as well as losses from bad loans, have put a big dent in bank profits. In this year's third quarter, compared with 1983, Citicorp's earnings fell 14%, Manufacturers Hanover's 23% and Chase Manhattan's 38%. Some experts fear that banks will be drawn into the same kind of pricing rivalries that led to bankruptcies in the deregulated airline industry. Says Albert Wojnilower, chief economist for the First Boston investment firm: "Banks can't be counted on to discipline themselves. Deregulation gave the banks enough rope to kill themselves, and they almost have."
As a result of the fierce competition and lower earnings, the once benevolent face of consumer banking has changed. In the past, banks used some of their profits to subsidize services that were either given away or priced below cost. Claiming that they can no longer afford such largesse, bankers are pushing up the fees they charge for overdrawn accounts or stop-payment orders on checks. Complains Daryl Erdman, a supermarket owner in Rochester, Minn.: "I can't think of anything my bank doesn't charge for, including rolling coins and handling food stamps." A survey by Sheshunoff & Co., a consulting firm, showed that 39% of U.S. banks boosted checking-account fees in 1983, and 55% were planning to raise them this year. Explains Robert Guyton, president of Atlanta's Bank South ($1.8 billion): "We've got to make sure that all the services we offer are paid for by the customers who are using them." Many banks, however, are charging more for some services than they actually cost. A study by New York State officials concluded that a bounced check costs the bank only about $6. Yet the 1,635 banks in the Sheshunoff survey charge customers an average of $9.46 for a returned check; some institutions ask $20 or more, and a few demand $30.
Consultant Whittle believes that banks should be allowed to set their own fees; he also admits that the financial institutions face a bad public-image problem. Says he: "If you maintain a balance under $100, banks should charge you $10 a month. But if they do that, they'll be run out of town on a rail." Indeed, the new fees have infuriated politicians and consumer advocates. They maintain that the charges usually hit individuals with $1,000 or less in their accounts, while wealthy depositors pay almost no fees and receive lavish services. Contends Stephen Brobeck, executive director of the Consumer Federation of America: "We are witnessing an increasing denial of banking services to the poor. The trend is toward serving the rich and ignoring the rest."
Legislators in several states are considering laws that would require banks to provide a minimum level of service, much like utilities. One recent study showed that 58% of consumers believed the Government should require banks to provide low-cost services for the poor. Bankers, however, view that as the next thing to socialism. "I think the industry is perfectly capable of meeting the needs of society," says Citicorp's Reed. "We're part of society, and we're decent people. I don't honestly believe it's necessary for the legislature to impose itself in this process." Some banks already offer so-called lifeline accounts with limited services but lower fees. Manufacturers Hanover, for example, provides free savings accounts for customers under 18 and waives fees on checking for retired persons.
Rising fees are only one item on the consumer grievance list. Another complaint is banking's continued use of the float on checks. While this is an old banking practice, it seems particularly irritating at a time when modern communications make it possible for banks to transfer funds around the world in a matter of seconds. Money deposited as checks can often be used by the customers only after holding periods that may range from two days to three weeks. During that hiatus, the bank has, in effect, impounded the money since it receives credit for the check and earns interest on the funds. This angers bank customers and can impose hardships. Says Walter Dartland, a Dade County, Fla., consumer advocate: "Students who get a check from their folks back in Iowa, for example, might have to wait two to three weeks before they can use the money. That puts them in a real bind."
Banks argue that the holding period is a safety precaution; they must wait to be sure the check will not be returned. Bankers resist changing their policy for another reason: it is a big profit maker. If the float, for example, gave banks the use of $60 billion per day, at 10% interest it would earn them $6 billion a year. Because of consumer protests, New York's state legislature last year passed a law forcing banks to credit depositors' accounts within one to six business days, depending on the size and origin of the check. Checks larger than $2,500, though, are exempted from that requirement.
As a result of these and other complaints, many consumers have come to regard bankers as greedy and impersonal. "I was treated rudely by several banks just in the course of having a checking account," says David Ohle of Lawrence, Kans., a writer and former English professor. "I never felt as though I was treated like a human being." Says Robert Wool, co-author of All You Need to Know About Banks: "The large banks are continually presenting themselves as human and warm and understanding. But the truth is that with very few exceptions, if you walk in and look for the same happy faces you saw in the TV ads, they usually aren't there."
When consumers say bankers are cold, they often focus their annoyance on the automatic-teller machine. Ironically, bankers installed the 24-hour ATMs partly for the benefit of customers, who have long complained about the inconvenience of bankers' hours. Banks, of course, also put in ATMS because they hope to save money on them once the technology is perfected. The number of ATMs in the U.S. has grown from 1,935 a decade ago to 48,118 at the end of last year.
Developing and safeguarding the machines has been no easy job. ATMs have been bombed by thieves, defaced by vandals and, in one incident in New York City, filled with glue. "You can't establish a relationship with a machine," says Joanne Slaight, general counsel of the New York Public Interest Research Group. "An ATM can't be a pillar of the community." New York's Citicorp made a public relations gaffe last year when it tried to force customers with less than $5,000 in their accounts to use an ATM rather than a human teller. The bank scrapped the plan after a storm of very human protests.
Some bankers have attempted to give ATMs a little of the traditional banking qualities that experts call the "warm and friendlies." One bank in New Jersey put a Santa Claus costume on its ATM during the Christmas season and a heart on it for Valentine's Day. In response, customers have put get-well cards in its deposit slot when the machine breaks down. Customers have improved the image of ATMs by using them as a place to meet new friends. Singles equipped with plastic cards and flashing smiles sometimes pick up dates as well as cash while in line at their neighborhood ATM.
Turning a warmer shoulder to consumers might help banks and their image. But they face a much more difficult problem: what to do about bad loans. The troubles go back to the early 1970s when the banks, flush with deposits from oil-producing countries and bent on growth, began to take on high-risk borrowers and tended, as Federal Reserve Chairman Paul Volcker put it, "to push money out the door as fast as possible." Some of the biggest of the bad loans were extended to Latin American countries (see box), but many were made at home.
In such states as Iowa and Kansas, bankers are currently worried about agricultural loans. Farmers are hurting because of falling crop prices and land values. In September the seemingly robust First Chicago ($40.5 billion) stunned investors by projecting a nearly $72 million third-quarter loss, blaming it partly on defaulted farm loans. "We're supposed to be having an economic recovery," says Reed Hoffman, president of Dickinson County Bank ($7.5 million) in Enterprise, Kans. "But it hasn't hit this part of the country. If things continue the way they are, we'll see more farm bankruptcies, more nonperforming loans and more bank closings."
The farm troubles often turn bankers into unwilling villains, a role they play in a recent crop of mortgage-melodrama movies, including Country and Places in the Heart. One case of real-life tragedy occurred in September 1983 in southwestern Minnesota, where a farmer and his 18-year-old son decided to get even with a small-town bank that had foreclosed on their land. The father and son lured two bankers to the farm and then shot them to death. One farmer in Nebraska was killed last month in a shootout with police who were serving him papers for a bank trying to collect on a loan.
Bankers got many of their current problems the old-fashioned way--they earned them. Says William Isaac, chairman of the FDIC: "The common thread in the industry's troubles is bad management. You can get away with a fair amount of poor management when the economy's in good shape, but if the economy turns sour, as it did in 1981-82, your mistakes are magnified." This does not mean that all bankers have turned into casino gamblers. "I don't think that bankers as a whole have become reckless," says Carlos Arboleya, vice chairman of Barnett Bank of South Florida. "But there will always be a certain percentage of wildcats."
In a business built largely on trust, a little wildness can be highly contagious. Consider the case of William G. Patterson, the highflying, unorthodox executive vice president of Oklahoma City's Penn Square Bank. While negotiating million-dollar deals in restaurants during the early 1980s, he would sometimes regale out-of-town clients with such stunts as drinking beer out of his cowboy boot or stuffing a roast quail into his pocket. In his office at Penn Square, he would sport Mickey Mouse ears or a hollowed-out duck decoy on his head. Patterson's lending ideas were just as madcap; his department invested 80% of the bank's lending portfolio in risky oil and gas ventures. Yet neither Patterson's antics nor his business bravura aroused much concern among officials of major banks, who bought $2 billion of Penn Square's loans. For large banks that want their business to grow in a hurry, buying loans helps them add new customers with minimal effort.
When Penn Square collapsed in July 1982, it blew the cover on the dubious management of more established banks. Penn Square's failure led directly to Continental Illinois' near disaster two years later; it also cost Chase Manhattan, the third largest U.S. bank, more than $200 million.
Most of Continental Illinois' troubles have been blamed on Roger Anderson, its ambitious chairman from 1973 until last April. Under Anderson, Continental was more interested in increasing its market share than in checking on the worthiness of borrowers. Result: a portfolio that included $2.3 billion in bad loans. At some other ailing banks, problems can be traced further down the organizational ladder. Inexperienced traders at Chase Manhattan lost some $285 million in 1982 by lending U.S. Treasury bonds, notes and bills to Drysdale Government Securities, a renegade Wall Street firm that had parlayed $5 million in capital into as much as $4 billion in holdings before it failed. The tiny company had bought securities in expectation that interest rates would go higher. When they did not, Drysdale lost its gamble.
The fundamental reason that many banks face problems is that they were simply unprepared for the rapid growth and change they faced after deregulation. Says Southeast Banking's Zwick: "There are not enough good bankers to accommodate the proliferation of the industry. We've allocated the limited number of qualified people we have." Some banks are now reaching out to consulting firms for expertise and training. Lawrence Darby, a former bank president, this year started a firm called Bankers Training & Consulting in St. Louis. One of its most successful educational tools is a video called The Worst Loan I Ever Made. Actors in the video portray bankers who deliver admonitions like "If the crooks don't get you, your friends will." The film, which costs $375, has so far been shown to more than 6,000 bankers. Says Darby: "There are more changes going on in banking than in Silicon Valley. There is a tremendous amount of confusion out there."
The financial revolution is now giving birth to a new breed of banker, perhaps best symbolized by Citicorp's Reed, 45. The boyish-looking chairman, who was appointed last June as Wriston's successor, is a consumer-banking specialist with an affinity for long-shot risks. Reed's hits and misses during his career have both been spectacular. In 1980 and 1981 he showered the country with 26 million letters inviting consumers to apply for Visa cards. Many of them fell into the wallets of poor credit risks, and Citicorp rang up some $75 million in bad debts. Nonetheless, Reed's bold push into consumer banking, which included blanketing New York City with ATMs, was ultimately successful. The bank's consumer division went from a loss of $79 million in 1980 to a profit of $202 million last year.
The new bankers often do not fit the button-down mold traditionally associated with high finance. Says Donald Waite, a director of the management consulting firm of McKinsey & Co.: "Bankers are no longer bankers. They are a whole lot of different things, and above all they are managers who can handle a group of disparate enterprises." At Citicorp, for example, Jesse Fink, 27, who studied forestry before receiving his M.B.A., heads the company's direct-mail program. Says he: "This organization is not very age conscious. You can get a lot of responsibility quickly." Says Vice President Jennie Schreder, 31, who used to conduct biophysics research and now manages the development of new products for Citicorp: "It's up to each person to make things work, so you have to be an entrepreneur."
Probably the trickiest aspect of managing a bank today is attracting a stable base of deposits. Loans are generally still made for long terms, but deposits have become increasingly short term and volatile. Many large banks, particularly those with ambitious lending policies, have grown dangerously dependent on the so-called hot-money deposits of pension funds, foreign corporations and other institutions.
The problem is that hot money knows no loyalty. At the first hint of trouble, rumored or real, these depositors tend to yank their funds. Says William Ogden, who was installed by Government regulators in July as chairman of Continental Illinois: "A modern run on a bank doesn't show up in lines at the teller windows, but in an increasing erosion of its capacity to purchase large blocks of funds in money markets." To ward off such electronic panics, many banks have tried to widen their deposit base to include a larger number of savers and to court better relations with big depositors.
As bankers try to diversify into new financial services, in order to compete with Sears, Merrill Lynch and the other money bazaars, they are pushing boldly into once forbidden fields, including insurance, stock brokerage and interstate banking. Congress has been slow in passing legislation that would control entry into these areas, so financiers have gone ahead on their own. Says C. Robert Brenton, former president of the American Bankers Association: "The Government has no vision for the evolution of the financial-services system in this country. We are quickly putting together a jerry-built financial structure, which includes flaws that work against the best interest of the public." Citicorp, for instance, plans to offer insurance by mail from offices located in South Dakota, the only state that allows banks to enter that field. BankAmerica and others also sell stocks through discount brokers, which is legal as long as they offer no investment advice directly in connection with the trade. The FDIC last week set rules so that 9,300 state-chartered banks can buy and sell corporate securities for their customers.
Despite the 1927 Pepper-McFadden Act and many similar state laws that forbid banks to set up branch offices outside their home state, major institutions have exploited technicalities to spread like kudzu across the landscape. Citicorp now operates 980 offices in 41 states. Comptroller of the Currency Conover gave the movement a boost this month by approving permits for 83 so-called nonbank banks. These are institutions that can take deposits and provide all other financial services except making commercial loans. Banks have also tried to boost their share of the mortgage market by acquiring thrift institutions, the traditional source of home loans. Last January Citicorp, for example, bought Chicago's troubled First Federal Savings & Loan ($4 billion) and Miami's New Biscayne Federal Savings ($1.9 billion).
The trend toward national banks worries people both inside and outside the industry. Says Rhode Island Democrat Fernand St Germain, chairman of the House Banking Committee: "Deregulation poses the greatest threat to the continued existence of a network of small and medium-size community banks. The claims [by the large banks] that deregulation is as good as ice cream and apple pie are beginning to wear thin." Donald Nutt, president of Baldwin State Bank ($25 million) in Baldwin City, Kans., frets about depersonalization. Says Nutt: "It's easy for the big banks to lose the human touch. If I'm here at 5 p.m. and a customer taps on my office window, he knows I'll let him in, even though we close at 3."
Many small businesses fear that branches of big chains will take local savings deposits but not lend them back to firms in the community. "In rural Minnesota, many banks lend money on a handshake," says Daryl Erdman, the Minnesota supermarket owner. "Even if a guy's financial statement is a mess, the banker knows he's good for it. What happens if Chase Manhattan puts a brand-new East Coast M.B. A. in here?"
Many regional banks like M & T of Buffalo hope to kindle customer loyalty by offering some of the personal touches that most big-city institutions have left behind. In the summer and fall, M & T stages daily concerts and fashion shows in a downtown plaza across from its main office. One M & T teller at a drive-up window hands out dog biscuits to customers with pets in their cars. The bank tries to make elderly customers feel at home by serving coffee and doughnuts and providing low-cost checking accounts with reassuring names like Worry Free and Pay as You Go.
The final responsibility for insuring the stability of the American banking system rests with federal regulators. As the industry's troubles have increased, regulators have begun cracking down harder. They are beginning to expect the unexpected. Says James Boland, deputy comptroller of the currency: "It's always the dog you don't see that bites you. We're not out of trouble yet because banks always tend to lag behind the economy." The comptroller's office is now examining the books of large banks two or three times a year, instead of just once. As a further incentive for prudence, the FDlC's Isaac has proposed that the premiums banks pay to the agency for deposit insurance should increase according to the proportion of their loans that are risky.
Nonetheless, some experts question the ability of regulators to keep up with the field they are supposed to be watching. Concedes a former FDIC official: "Getting good people and keeping them is very hard to do. They really are not compensated very well for their talents." The problem is made tougher because responsibility for overseeing the country's banks is shared by six federal and 50 state agencies.
The recent string of bank failures has raised worries about whether the $17 billion in the FDlC's insurance fund is enough to protect the banking system and depositors. Officials contend that the regulators have enough money to get the job done. Says FDIC Chair man Isaac: "We have the capacity, along with the Federal Reserve, to deal with any scenario you can imagine." Some bankers have already made strategic changes that may help keep them profitable in an increasingly competitive market place. Says Manufacturers' McGillicuddy: "When people say the banking industry hasn't responded, it just doesn't square with the facts." Several banks have cautiously narrowed their focus. Manhattan's Bankers Trust ($40 billion), for example, has become one of the most profitable large U.S. banks by dramatically curtailing its consumer business in order to devote itself to merchant banking, a step that involved shedding more than 100 of its branches. Ben Love, chairman of Houston's Texas Commerce Bancshares ($20 billion), saved his bank from the Southwest's energy-lending disaster by holding firmly to a highly cautious lending policy: all major loans require unanimous approval from a committee of 14 senior bank officials. BankAmerica, whose profits have been pummeled in the past three years, formed a Retail Action Team, dubbed RAT, to cut back the company's overgrown branch system. The bank plans to close at least 121 of its 1,071 branch offices this year, despite angry complaints from customers.
A bank's most important asset is not the cash in its vaults, but its customers' confidence. In the past few hectic months, some bankers have made heavy withdrawals from their confidence accounts. Financial leaders must now show that they can use their freedom from regulation to rebuild a strong and stable banking system.
-- By Stephen Koepp. Reported by William Blaylock/San Francisco, Christopher Redman /Washington and Adam Zagorin/New York
With reporting by William Blaylock, Christopher Redman, Adam Zagorin