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