Banks: The Need to Get Personal

Jose D. Roncal


While the G-20 world leaders meet and discuss ways to reverse the deep global recession, others like Nouriel Roubini, the New York University professor, focuses on what’s happening back home.  He predicts that U.S. stocks will continue to fall and that some major banks will go belly up with loan and securities losses reaching $3.6 trillion.
Others push for nationalizing the banks, but whether that’s a good thing or not, depends on who you are talking to. The government is already so deeply embedded in the banks through guaranteeing debt and TARP money, it’s hard to predict how banks will be able to once again function as private entities.

As the economy continues to decline, banks are being forced to weigh their options and examine how much capital they will need, what assets to sell. We suspect that the majority of banks will work out plans on their own, but that a few will have to rely on government support.

But questions remain about how banks will be able to attract new, private capital.  Over the last six months, there isn’t much evidence that they’ve raised any significant capital.  In fact, most of the debt they’ve raised has come with government guarantees. With new, stricter regulation coming in the future, which will require banks to have higher capital ratios, that means it will be more expensive to sell debt. And what will happen once the government guarantees are gone?  Even more expensive debt.

Is nationalizing the banks the solutions?  We’re not convinced that it’s the best answer. The biggest problem today is that five major banks have controlled two-thirds of all mortgage originations and two-thirds of credit-card loans outstanding.

The changes in the banking industry have been so dramatic over the years, it’s hard to imagine how they will get back to the old fashioned personal relationships our parents knew.  Banks no longer know their borrowers, we don’t know our lenders, and nobody bothers to find out what regional stresses the borrowers are going through.


To regain the public trust, we think it’s going to require more emphasis on a regional-type lending environment. Actually, many of the more regional and localized financial institutions are healthy and have not taken any TARP funds.

The government needs to take steps to support and build up these regional lenders. The U.S. consumer is key to the health of the economy, so growing regional banks and fostering a closer relationship with borrowers could be a boost to the growth of small businesses and subsequently to the economy as a whole.  
The Feds have already started to lay the groundwork for this with the “stress tests” by giving capital to the healthy banks so they can go out and acquire smaller banks,  grow and consolidate.

When the strong banks begin to pay back TARP capital, some of those funds should be reallocated regional banks and lending institutions.

More regulations could create greater visibility and greater transparency, which is important to help the investors make the best decisions. But nationalizing the banks could
undermine confidence in the nation’s financial system.  It would wipe out current shareholders and still there would be no guarantee that it would stabilize the country’s banking system.

In a complex fast moving world of high-speed modern technology, where global economies collide and security instruments are no longer understandable by the average investor, and where financial institutions have become so bloated and top heavy, they are considered too big to fail, maybe smaller is better and a return to good old fashioned banking concepts is not such a bad idea.

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About the author

José D. Roncal is a truly global executive with over 20 years of experience in international business and finance, having worked and travelled frequently in six continents