See the complete list of trends that we analyze. 1. Introduction to the Banking, Mortgages & Credit Industry The financial services industry (banking, lending, credit cards, investments and insurance) was suffering miserably on a global basis in 2008 in the midst of what will be remembered in business history books as the “Great Financial Crisis.” As 2009 wound to a close, governments worldwide had propped up the banking system to the extent that some stability had returned, and a few notable firms were posting good profits. However, a complete turnaround of the world’s economy and a rebound of the banking and investment industry will take a long and trying time.
How did this disaster occur? Multiple factors were involved, many of which began as long ago as 2001, including:- An era of loose lending rules for business loans.
- Incredibly easy credit for consumer loans, including mortgages, automobile loans and credit cards.
- Exceptionally low interest rates.
- A multi-year, worldwide economic boom that encouraged risk-taking by borrowers and lenders alike.
- A multi-year, worldwide jump in market prices for stocks, houses and commodities that further encouraged risk-taking and easy lending.
- Booming global markets for manufactured goods and for commodities such as oil created immense cash reserves in emerging nations, and much of those reserves were eagerly invested in debt instruments of all types, further fueling lending.
- Investors in debt-backed securities were lured into a false sense of security by overly optimistic ratings placed on those securities. Many of these very highly rated mortgage packages turned out to be of little value. Meanwhile investors often thought their risks were well-covered by “credit default swaps (CDS),” a type of insurance that will pay off if a debtor defaults. However, the CDS are only as good as the finances of the company backing them.
- Investment banks, such as Lehman Brothers, were overextended, operating with very high leverage. Typically, they were holding assets equal to about 30 times their total level of capital. That means that they were borrowing heavily, at a rate of about $97 for every $3 of capital, and that a downward turn in asset values could (and did) quickly have devastating effects on their balance sheets.
Finally, in mid-2007, the bubble began to pop when a financial firm in Europe awoke to find that there was no longer an eager market for the mortgage-backed securities that it wanted to unload. The world of finance entered a downward spiral.
It would be easy, but incomplete, to point the blame at the United States. America is an easy target for blame—as the world’s largest economy by far, America’s economic bust has affected lenders, businesses and investors on a worldwide basis. Of course, those lenders, businesses and investors also benefited broadly, and gleefully, from America’s tremendous boom from 2003 through most of 2007.
America’s soaring housing market and easy credit led to the creation of poorly-conceived mortgages and mortgage securities. Investors who bought them have suffered. However, eager lenders, rocketing house prices, easy mortgages, aggressive construction of houses and high consumer debt were found not only in America, but were also matched or even exceeded in nations like the U.K. and Spain, and in major cities in nations such as Australia and Canada. Housing markets, stock markets and risk-taking rose to absurd levels in cities in Russia, China and India as well. The U.S. did have a unique impetus to its mortgage market: In recent years, Congress had unwisely pushed the mortgage industry, including government-sponsored mortgage banks Fannie Mae and Freddie Mac, to make home ownership easier to attain for people of modest income.
The FDIC’s September 2009 takeover of Corus Bank marked the 93rd bank failure so far that year. In 2008 there were 26 such failures; following only three in 2007; and none in 2006 and 2005. Predictably, Corus Bank, with about $7 billion in assets, was one of America’s biggest lenders to developers of condominium projects in markets that soon blew up, such as Phoenix and Arizona. In October 2009, Capmark Financial, one of America’s largest lenders on commercial real estate, found itself in bankruptcy, with $21 billion in assets. November 2009 saw one of America’s largest lenders to small and mid-sized businesses, CIT Group, file for bankruptcy, with $71 billion in assets, despite the fact that it had received $2.3 billion in federal bailout money in December 2008.
Today, consumers in America have become much more reluctant to use debt. This will have deep effects on the lending industry. Consumers are buying less of everything, and they are paying down credit card balances.
Banking has become a globalized industry in recent decades, in the same way that the automobile, pharmaceutical, technology, energy and consumer goods industries have globalized. The globalization of the banking industry was fueled by four factors: 1) the availability of global electronic networks for distribution of funds and real-time management information; 2) the easing of local regulations on ownership by foreign entities; 3) the opportunity to serve the needs of multinational corporations; and 4) the increasing attractiveness, from a banker’s point of view, of business assets and rising household wealth in emerging economies. New business opportunities were sought out globally by major banks, especially in such booming markets as China and India. U.S. and European banks particularly took ownership in Chinese banks. Elsewhere, Spanish banks acquired banking firms in South America, Mexico, Puerto Rico and the United States (particularly in Hispanic markets within the U.S.). German and Italian banks merged to form European banking giants.
In the U.S., Europe and elsewhere, banks are under intense scrutiny, and major regulatory changes are under consideration along with increased oversight. The fact that governments own major stakes in banks thanks to recent bailouts means that bureaucrats are dictating to some bankers what salaries and bonuses they may earn as well as what risks they may take. Bankers in the U.K. and EU, for example, are under pressure to maintain much higher levels of capital in order to better cushion against future losses. In the U.K., RBS is taking additional government support, which is putting it in a position where it must sell off several business units. The government will end up with as much as an 84% stake in the company. Major American banks continue to go through wrenching changes. Bank of America’s CEO planned to step down at year-end 2009. The company had been through rapid acquisitions of investment bank Merrill Lynch and mortgage firm Countrywide along with vast overall changes and layoffs.
Meanwhile, Congress has already passed powerful new legislation that will control credit card issuers, in the interest of consumer protection. Likewise, Congress is considering the creation of a new federal agency charged with oversight of the entire financial services industry. If it comes to pass, such an agency would attempt to protect consumers from deceptive lending offers and credit card terms, predatory lending, deceptive or inappropriate mortgage offers and other abuses.
As of mid 2009, the American banking system consisted of 8,195 FDIC-insured commercial banks and savings associations, owning more than 80,000 offices. Deposits in FDIC-insured organizations totaled $8.08 trillion in June 2009, up from $7.42 trillion in June 2008, while assets totaled $11.9 trillion (up from $11.43 trillion one year earlier). In addition, as 2009 began, there were 7,806 credit unions (down from 8,101 a year earlier), with assets totaling $813.4 billion.
U.S. employment at banks, savings associations and credit unions totaled about 1.819 million in August 2009, down from 1.831 million one year earlier. Another 630.8 thousand worked in other credit-related activities, such as mortgages and credit card operations.
Meanwhile, as of the end of 2008, U.S. consumers enjoyed the use of 425,010 ATMs around the nation, including 290,000 at non-bank locations.
American banking, until recently, enjoyed a state of deregulation not seen in decades. As a result, vast, national banking institutions grew rapidly by acquiring regional banking firms, entering new fields, increasing assets and expanding globally. The number of branch banks expanded as firms opened not only traditional branches but also branches in alternative locations such as supermarkets and Wal-Mart stores. Hundreds of thousands of ATMs across America became more sophisticated and multi-task capable, making them virtual branches.
Meanwhile, consumers and businesses are becoming much more reliant on online management of their bank accounts as the number of homes and businesses enjoying broadband access to the Internet has reached true mass-market scope. Over 150 million U.S. homes and businesses now have broadband, and banks are evolving their online services to take advantage of this infrastructure.
Despite the recent recession, non-bank companies remain a competitive threat to traditional banks. Retailers, automobile manufacturers, stock brokers, insurance companies and other business sectors are offering a growing array of bank-like services, from loans and mortgages, to credit cards, to money market accounts with checking account-like features.
The credit card industry is evolving as well. A truly revolutionary wave of “smart” cellular phones that act like debit cards and manage financial accounts is sweeping Asia and slowly taking root in Europe and the U.S. More importantly, highly secure mobile banking, bill payments and remittances to family members are now widely available in the remotest corners of the world thanks to innovative firms that have launched text message-based banking systems. The world’s cellphone subscriber base has reached 4 billion, as phone and airtime prices have reached rock-bottom levels and cellular service has reached even the world’s poorest villages. This is a true banking revolution in the making. One-man, street-side banking services are being provided in village squares, using cellphones and text messages as a way to record and track accounts held remotely by big city banks. The local “banker” receives and dispenses cash, opens accounts and explains the use of mobile phones to enable the system.
Elsewhere, some major bank companies are using special units to provide services that conform to the tenets of Islam in order to take advantage of the rapidly growing Muslim population and the high income of oil-producing Muslim nations and Muslim-owned businesses. (The Islamic concept of “Sharia” strictly limits the use of interest charges. Instead, many business deals must be structured on lease, rent or other alternative contracts in order to be acceptable.) Many Muslim-owned banks are competing fiercely while enjoying growth.
As of August 2009, American households owed more than $2.51 trillion in consumer debt, In addition, residential mortgages in mid-2009 totaled $10.9 trillion, according to the Federal Reserve. Up until early 2007, mortgage lenders had been pushing a long list of innovative products designed to make it easier to borrow while lowering monthly payment and credit rating requirements. Some of these mortgage variations were bound to lure consumers into self-destructive borrowing and buying as they paid too much for properties while diving deeply into debt. These products ranged from zero-down mortgages to 40-year, fixed-rate loans to “option” loans that allow the borrower to defer a large part of each month’s payment. Many home owners now find themselves vastly overleveraged as a result of such mortgages. Banks, investment houses and investors of all types have written off hundreds of billions of dollars in mortgages during 2007 through 2009 as a result. The problem has not yet been fully dealt with.What’s next in the world of banking, lending and Investments? Here are a few emerging trends to watch for:
1) Greatly increased regulatory oversight will restrict lenders and investment companies of all types.
2) An era of much lower risk-taking by traditional lenders has begun that will last for years.
3) The creation of higher-risk loans and investments will be taken over to a major extent by hedge funds and private equity funds, accelerating a trend that has already been in place for some time, and replacing some of the former roles of commercial banks and investment banks. Nonetheless, risk capital will be hard to find.
4) Intense debate will ensue about the possible creation of a global authority that could oversee banking, lending and investment sectors from a high level and perhaps act quickly to commit the central banks of the richest nations as a cohesive force in the event of emergencies.
5) Alternative lending sources will be used to a growing degree by small businesses and some consumers unable to get loans elsewhere. For example, peer-to-peer lending companies are growing through enabling lending by and between members of lending clubs, or between friends and family. Virgin Money USA makes it easy for reliable small business owners to set up loans from friends. Prosper.com enables borrowers to apply for three-year, fixed-rate personal loans online by connecting borrowers with individual lenders. On the other end of the spectrum, small businesses that are unable to obtain or renew bank loans will turn to high-cost “factoring,” a method of borrowing against their receivables. Elsewhere “angel investors,” wealthy individuals who make investments in small but promising firms, are filling the capital needs of many growth companies and startups.
6) A lengthy and expensive process of write-downs by lenders will continue into 2010 and 2011.
7) In the United States, consumers are shying away from debt, paying down balances, shopping less and using credit cards less. This is part of what will be a long term consumer trend towards increased savings, lower consumption and lower debt.
Source: Plunkett Research, Ltd. |
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