With some noteworthy exceptions, the banking and lending industry has generally rebounded to a healthier condition as of 2010-11 after suffering intensely from late 2007 through much of 2009 during the Great Recession.  However, many problems remain unsolved in the financial industry.  In October 2010, the International Monetary Fund (IMF) warned of persistent risks in the banking system due to high levels of government debt in mature economies, slow economic growth in many nations, and other significant, difficult to solve problems.  Hundreds of banks failed in the U.S. during 2010 and 2011.  In the U.K., major banking firms such as HSBC and RBS remain largely owned by the national government after being bailed out at substantial cost during the financial bust.  More recently, the French-Belgian bank Dexia received a new government bailout in the fall of 2011, after being rescued earlier during the financial crisis.

There clearly remains daunting global risk within the banking industry, in particular the risks to banks holding bonds issued by deeply indebted European nations including Italy, Spain and Greece.  Banks around the world are subject to immense potential losses from such bonds, whether they hold the bonds directly or they are parties to derivatives, credit swaps, guarantees or financial transactions partly reliant upon the stability of these bonds.

A complete turnaround of the world’s economy and a rebound of the banking industry will take a long and trying time.  Today, consumers in many nations have become much more reluctant to go into debt.  This will have deep effects on the lending industry and on the pace of economic growth.  Consumers in America are buying less of everything than they did during the last boom, which ended in 2007, and they are paying down debts in general as they “deleverage.”

Banking has become a globalized industry in recent decades, like most other sectors.  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 restrictions 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.  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.

Regulation:  New regulations are about to put banks under pressure, making it more difficult to operate and more difficult to earn profits.  The EU has established stringent new rules on banks.  In October 2011, major European nations were so concerned about the exposure of their banks to potential losses on bonds issued by highly indebted European nations that leaders in Germany and France were recommending that Tier-1 bank capital requirements be raised to a very high 9% of assets by 2013.  (Tier-1 capital is a ratio of equity capital plus stated bank reserves, to assets, and is a commonly used measure of a bank’s core financial stability.)

Meanwhile, the global committee known as the Basel Committee on Banking Supervision (BCBS) continues to monitor the health of the banking system and issue recommendations for minimum bank capital and risk management.  The biggest upcoming changes faced by banks that plan to comply with the latest round of recommendations, the “Basel III” accords, will be in raising sufficient capital.  The Tier-1 capital requirement will increase to 10.5% by 2019.  (In contrast, the massive UK bank RBS had only about 3.5% of Tier-1 capital when the Great Financial Crisis began, and the bank promptly failed.  U.S. banks endured losses equal to about 7% of assets during the recent crisis.)  The intent is to make it much less likely that massive bank failures will be faced in the future, even during a major financial crisis.

While this may be desirable from a stability point of view, it places significant constraints on banks, as the result will be that they earn a lower profit ratio on assets, and they will likely be required to sell large amounts of new stock, thus diluting the positions of existing stockholders.  (An alternative way to raise capital would be to sell large amounts of assets.)  Compliance with Basel accords is recommended to the governments and regulatory authorities where global banks are based, including the U.S.  Nations may choose whether and to what extent to comply on a voluntary basis.  In order to comply with the recommended 2019 standard, U.S. and EU banks would need to raise more than $2 trillion in new capital.

Many banks are in much better financial condition than they were in 2008-09, as they have been raising their equity capital levels in recent months, getting a start on meeting future requirements.  For example, as of mid-2011, U.S. banks had increased their total equity capital by 20%, or $264 billion, since the end of 2008.  This gives them a much greater cushion against potential losses.  During that time, American banks also vastly increased their amount of cash on hand, to about $1.8 trillion.

In the U.S. a sweeping reform bill, the Dodd-Frank Wall Street Reform and Consumer Protection Act, was signed by President Obama in July 2010, after European finance ministers approved similar regulations for much of Europe a few months earlier.  Unfortunately, much of the Dodd-Frank bill is vague and not yet fully defined as of 2011, leaving the banking and investment industry in a struggle to understand its full effects.  In general, requirements under the new U.S. law include broad powers for the government to monitor systemic financial risk and to intervene where it deems necessary.  For example, it requires a bank to shrink in size if the government believes that the bank is posing financial risks, and an orderly liquidation process has been set out for extreme cases in which regulators need to seize and auction off financial firms that are nearing bankruptcy.

Another requirement is the creation of a Bureau of Consumer Financial Protection that will oversee and regulate the issuance of things like mortgages, credit cards, personal loans and retirement plans.  The bureau has a $500 million budget that does not require Congressional approval.  The budget is funded by the Federal Reserve.  The new agency has the authority to enforce its rules on banks with more than $10 million in assets.  As of 2011, the bureau was still a work in progress.

Under Dodd-Frank, banks will be required to maintain much larger levels of capital.  Credit card issuers will be required to operate under modified rules that are much more consumer-friendly than in the past.  Debit card processors will be required to charge lower fees on transactions.

Other provisions of the bill include a permanent increase in federal deposit insurance from $100,000 to $250,000; requiring mortgage lenders to verify that borrowers are likely to be able to repay their loans; and the establishment of a new Federal Insurance Office within the Treasury Department to oversee the insurance industry.  Supporters of the new law contend that the recent financial crisis proves the need for government protection of consumers against abusive financial practices.  Detractors are concerned with the potential for too much new oversight enforced by inefficient new bureaucracies, placing a strangle-hold on business and productivity.

The U.S. Banking Industry:  As of mid-2011, the American banking system consisted of 7,513 FDIC-insured commercial banks and savings associations (down from 7,785 in mid-2010 and 8,195 in mid-2009), owning 87,873 bank offices and 10,319 savings association offices.  Deposits in FDIC-insured organizations totaled $8.85 trillion in June 2011, up from $8.24 trillion in June 2010, while assets totaled $12.36 trillion (up from $11.97 one year earlier).  In addition, as 2011 began, there were 7,339 credit unions (down from 8,101 in 2008), with assets totaling $914.5 billion.

U.S. employment at banks, savings associations, credit unions, credit card firms, mortgage brokers, payment transaction processors and other types of lenders totaled about 2.545 million in August 2011, essentially unchanged from one year earlier, and down dramatically from 2.924 million in 2006.  Meanwhile, U.S. consumers had access to about 401,500 ATM machines nationwide.

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 100 million U.S. homes and businesses now have broadband, and banks are evolving their online services to take advantage of this infrastructure, while tens of millions of consumers can access their bank accounts via smartphones and other mobile devices.

The “Shadow Banking” System:  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.  Wal-Mart has become a retail financial services giant by opening banks within its stores in Mexico and “Money Centers” within more than 1,800 of its U.S. stores, where customers can pay bills, cash checks and perform other non-depository business.  Hedge funds and other alternative investment companies have been making corporate loans, taking some market share away from commercial banks.

Other Important Changes in Credit Cards, Mortgages and Banking:  Due to reduced lending activity, since the financial crisis ensued, and increased regulation that decreases the potential to earn profits from investments and other activities at banks, bankers are looking for ways to increase fee income.  For example, fees charged to consumers and businesses for checking accounts have increased, while numerous strategies are being tried to increase fees received from credit card holders.  However, certain types of credit card fees and charges have been restricted dramatically by new legislation, including a ban on high “activation” fees, a deep cut in fees that can be charged to stores for debit card transactions, and certain restrictions on raising promotional interest rates.  Bank of America and a few other banks tried to compensate by establishing monthly fees for customers who used debit cards to make purchases in stores, but there was such a backlash from consumer groups that these fees were quickly dropped.

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.  Firms on all sides of this market are trying to gain an early lead, including Internet companies like Google, cellphone manufacturers and credit card companies like Visa.

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 via cellphones.  The world’s cellphone subscriber base has topped 5 billion, as phone and airtime prices have reached rock-bottom levels and cellular service has penetrated 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 2010, American households owed $2.43 trillion in consumer debt, up slightly from $2.41 trillion one year earlier, but down from $2.57 trillion at the same time in 2008.  In addition, residential mortgages had slipped to $10.4 trillion in the second quarter of 2011, down slightly over the past year, but down substantially from $11.25 trillion in the second quarter of 2008.

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.  The problem has not yet been fully dealt with, and nearly 10% of U.S. residential mortgages were delinquent as of mid-2011.