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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