ABA Banking Journal - November 2008 - (Page 78)

100YEARS FIRST PERSON Challenges and opportunities lie ahead Former FDIC Chairman Bill Isaac knows from personal experience that banks have been through even worse before this, and rebounded I extend my heartiest congratulations to the ABA Banking Journal on its 100th anniversary issue. I thought I would try to put 100 years of bank publishing in perspective. As ABA Banking Journal was getting off the ground in 1908: • The Bank of Italy, founded in 1904 by A.P. Giannini, opened its new headquarters building at Clay & Montgomery in San Francisco. The bank was soon to become Bank of America and be part of Giannini’s Transamerica empire. • General Motors was founded, and Henry Ford introduced the Model T. • William Howard Taft was elected President, and Pu Yi became China’s Last Emperor at three. What had not happened by 1908 were several major developments that were to have a profound impact on shaping the financial services industry: • The stock market crash of 1929 and the ensuing banking panic and Great Depression • Creation of the Federal Reserve System, the Federal Deposit Insurance System, and the Securities and Exchange Commission • Passage of the Glass-Steagall Act, separating commercial banking from investment banking, nor passage of other laws limiting competition • Passage of the Bank Holding Company Act, separating banking and commerce and limiting expansion by banking companies (largely to thwart Transamerica/Bank of America’s expansion) It’s impressive to think about an industry and its leading magazine not only surviving, but prospering, through all of this change. It’s also daunting to try forecasting what might come next. Much of the regulatory regime imposed on financial institutions during the Great Depression crumbled in the wake of revolutionary technological developments and intense competition. Controls on deposit rates were eliminated in the early 1980s, branching restraints fell next, and the Glass-Steagall Act was repealed in 1999. The Bank Holding Company Act will be repealed, eventually. Size versus success versus style Strong, well-managed firms of all sizes will prosper in a market-oriented financial system. In the “old days,” before the barriers to competition unraveled, profits and growth in banking were stable. The distinctions in performance among banks were minimal. Earnings today are more volatile. The gaps between the performance levels of strong and marginal banks are wide and growing. Average and sometimes even good performance is not adequate protection against takeover. Banks that prosper in the new environment will share some characteristics. Contrary to commonly accepted wisdom, size will not be one of them. While scale economies exist in some of the businesses (e.g., credit cards and mortgage banking), they do not exist generally in traditional banking activities. Where scale economies exist, they can be achieved by smaller banks through outsourcing. Moreover, technology is relatively inexpensive, and readily available to smaller firms. One of the most critical factors for success is a quality management team. Organizing the team properly will also be critical, particularly in larger companies. A highly centralized organization, in which a handful of individuals make decisions that have impact throughout the firm, is at odds with the need to diversify risk. The best model will be independent business units pursuing company-wide strategies, with centralized control systems. When the inevitable mistakes are made, they will likely be far more serious in a centralized company than in one composed of a number of autonomous business units. A strong, focused sales and customer service culture is also critical. But banks will only prosper if they are in touch with customers, remain trusted advisors, and add more value than competitors. Pro-cyclical threats must be changed I would be remiss if I did not discuss briefly two clouds on the horizon: fair-value accounting and William Isaac Chairman of the Federal Deposit Insurance Corporation from 1978 to 1985, today Bill Isaac is chairman of the respected consulting firm The Secura Group. The consultancy was founded in 1986. The group is now part of LECG, LLC, a multiindustry consulting firm headquartered in Washington, D.C. Isaac’s insights from earlier tumultuous times in banking are well worth noting. This article was written in early September, before some of the most dramatic recent events unfolded. Isaac has opposed some of the measures taken this fall, including raising deposit insurance to a “temporary” general level of $250,000. By William Isaac, chairman, Secura Group, Washington, D.C. 78 NOVEMBER 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com http://www.securagroup.com http://www.securagroup.com http://www.ababj.com

Table of Contents Feed for the Digital Edition of ABA Banking Journal - November 2008

ABA Banking Journal - November 2008 Contents Editor's Column Banking 2.0: Credit, Banking's Essence, Set for Rethinking Snapshot: The Few, the Proud, the Banks that Can Raise Capital Will Strong and Simple Banks Inherit the Business? Back to the Future ABA Resources ABA Chairman's Position Farm Lenders Must Take Care When Lending in Indian Country Pass the Aspirin Into the Breach Adventures Across A Century What the Future Holds, Post Crisis Paul Volcker: A Financial Legend Still Speaks Strong Ed Yingling: Weathering the Storm Dick Kovacevich: "Boring" Banking to Dynamic Financial Services Jim Culberson: Community Banking: What has Changed and What Shouldn't Walter Shipley: How a Chemical Reaction Helped to Mold Today's JPMorgan Chase William Isaac: Challenges and Opportunities Ahead for Banks A Hundred Years from Our Pages Eight Tech Innovations that Brought Banks into 21st Century Bank Cherokee: Third Generaton Marks 100th Year The First National Bank of Altavista: Railroad Gave Birth to a Town, a Hope Chest, and a Bank Rosedales Federal Savings and Loan Association: How a Friendly Game of Cards Turned into a 100-Year Mutual New Washington State Bank: Cooking Up the Next 100 Years Mailbox Banker's Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - November 2008

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