Banking, Mortgages & Lending Business Trends Analysis, Business and Industry Trends Analysis

With few exceptions, the banking and lending industry has rebounded to a much healthier condition after suffering intensely from the Great Recession that officially ended in 2009, along with the related financial meltdown that brought the world of banking into a state of crisis.  Meanwhile, global financial regulators have steadfastly continued the struggle to improve banking reserves and oversight to the point that future meltdowns might be avoided.

On the positive side, banks in Europe and the U.S. have been put through stress tests by regulators, and have been forced to dramatically increase their levels of capital.  Banks are posting very high levels of capital that will give them a significant cushion against potential losses.

Today, consumers in many nations have become much more reluctant to go into debt than they were during the boom that ended in 2007.  This is having deep effects on the lending industry and on the pace of economic growth.

Consumers in America have been paying down debt in general for several years, with notable exceptions:  1) They have greatly increased their purchases of automobiles, and the total amount of car loans has been rising.  This is due to the fact that consumers delayed car purchases during the recent recession, have a bit more confidence now and are taking advantage of low interest rates.  2) Total student debt rose significantly in recent years due to rising tuition costs and college fees, along with the fact that many people returned to college or graduate school because they were discouraged by the difficult jobs market.  3) Mortgage debt is on a slow rise as the housing market picks up and foreclosures slow down.

Total credit card debt has dropped quite substantially since 2007.  Fortunately, in 2013-15, the American housing market was enjoying a good recovery, which is a dramatic help to homeowners and lenders alike.  Confidence among American consumers had risen by the end of 2014 to the point that they were slightly increasing their use of credit cards.

Banking has become a highly globalized industry.  This was fueled by four factors:  1) the availability of global electronic networks for distribution of funds and real-time management of information; 2) the easing of local restrictions on ownership of banks 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 rising household wealth in emerging economies.  New 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.).

Regulation:  In the U.S. and Europe, one rapid result of the global financial crisis was a cry in the halls of government for greatly increased supervision and revamped regulation of the financial industry, from banking to insurance to the investment sector.  New regulations are putting banks under pressure, making it more difficult to operate and harder to earn profits.  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 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 minimum capital requirement will increase to 8.5% by 2019.

Tier-1 capital is a ratio of equity capital plus stated bank reserves to assets, and is commonly used to measure a bank’s core financial stability.  (The massive UK bank RBS had only about 3.5% of Tier-1 capital when the 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 upheaval.  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.

While this may be desirable from a stability point of view, it places burdensome constraints on banks.  As a result, they will earn a lower profit ratio on assets.  Also, in many cases, they are required to sell large amounts of new stock, thus diluting the positions of existing stockholders.  (An alternative way to raise capital is to sell large amounts of assets, which many banks have been doing.)

Globally, in order to comply with the Basel III standards, the world’s leading banks need to raise billions of dollars in additional capital from 2013 to 2019.  As of mid-2013, the Basel Committee was reporting that the shortfall in capital was shrinking as banks continued to recapitalize.  Banks got something of a break in January 2013 when the rules were relaxed slightly.  Certain requirements that would have begun in 2015 were pushed back to 2019, and the types of assets that can be counted toward meeting a bank’s liquidity requirements were made more flexible and lenient.

However, in April 2014, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) set a final rule which calls for banks with more than $700 billion in assets to maintain a larger capital cushion against losses.  Specifically, the leverage ratio of these banks or their holding companies rose from 3% to 5%, with insured deposit-taking banks inside these entities’ ratio rising to 6%.  The Federal Reserve proposed yet another rule in December 2014 that would increase capital requirements for the largest U.S. banks, including JPMorgan Chase and Goldman Sachs.  The new proposal adds surcharges to the 7% base requirement (which stipulates that capital must be equivalent to 7% of an institution’s assets), which could lead to as much as an 11.5% base.

In October 2015, the Federal Reserve proposed additional capital requirements that are even more stringent for the eight largest U.S. banking firms.  If it is finally enacted, the rule will deal with “total loss-absorbing capacity.”  The requirement will be that these banks rely on long-term debt (through selling bonds backed by the bank) as a buffer, in addition to paid-in capital (the bank’s equity).  The theory is that in the event of a bank failure, the debt portion of the buffer would be available to absorb losses if the equity is wiped out.  Then, the debt would be converted into new equity to provide a basis for the reorganization of the bank.  This total buffer would rise to 18% by 2022.

Another looming issue that was recently finalized is the Supplementary Leverage Ratio rule for banks with over $250 billion in assets.  The rule is intended to limit banks' ability to use sophisticated accounting and special corporate structures to build up liabilities off of their balance sheets.  Disclosure must begin on January 1, 2015 for all banks.  The leverage ratio is calculated by dividing Tier 1 capital by total consolidated assets.

In addition to the Basel accords, an international group known as the Financial Stability Board (FSB) makes recommendations to the world's governments as to regulation of financial services industries.  In November 2014, the FSB issued new guidelines that would require massive injections of new capital (or the availability of vast amounts of cash on hand through the issuance of new bank debt) at many of the world’s 30 largest banks.  The intent is to make sure that the banks have sufficient “loss-absorbing capacity” in the event that a major financial disruption occurs which would drive down the value of loans and assets held by the banks.  A further goal is that the banks should be able to stand on their own, in case of a financial shock, without the need for government bailouts.  America’s largest banks, such as Wells Fargo and Bank of America, could be required to raise tens of billions of dollars, depending on how the recommendations are interpreted and implemented by the U.S. Federal Reserve.  Likewise, Europe’s largest banks would face stiff new capital requirements.  Capital requirements would be significantly higher than those of Basel III rules.

The U.S. Banking Industry:  As of mid-2015, the American banking system consisted of 6,280 FDIC-insured commercial banks and savings associations (down from 6,659 in mid-2014 and 7,513 as recently as mid-2011), owning 85,856 bank offices (down from 86,530 in the previous year) and 7,417 savings association offices (down from 8,155 in mid-2014 and 10,319 in 2011).  In addition, in mid-2015 there were 6,206 credit unions (down from 6,429 the previous year and 7,339 as recently as 2011), with assets totaling $1.115 trillion, up from $1.044 trillion the previous year.

U.S. employment at banks, savings associations, credit unions, credit card firms, mortgage brokers, payment transaction processors and other types of lenders totaled 2.598 million in July 2015, down slightly from one year earlier.  Meanwhile, U.S. consumers had access to about 450,000 ATM machines nationwide.  This ready access to ATMs, combined with the growing popularity of accessing accounts online, has dramatically cut the need for bank branches and bank employees.

Consumers and businesses are becoming much more reliant upon online management of their bank accounts as the number of homes and businesses with fast access to the Internet has soared.  By late 2014, over 96 million U.S. homes and businesses had broadband, while 234.5 million Americans had smartphones and other mobile devices with Internet access.

The “Shadow Banking” System:  Non-bank companies that offer financial services are 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, along with “Money Centers” within more than 1,800 of its U.S. stores.  Its Bluebird cash card enables customers to pay bills, cash checks and perform other non-depository business.  In September 2014, Wal-Mart announced a partnership with Green Dot Corporation whereby the retailer now offers low-cost checking accounts called GoBank, through a Green Dot-owned bank.

Hedge funds and other alternative investment companies are making corporate loans, taking market share away from commercial banks.  General Electric makes massive amounts of corporate and business loans.  The Financial Stability Oversight Committee, part of the U.S. Department of the Treasury, is increasing its oversight of the largest non-bank financial services firms.  More recently, trends in financial technology (“FinTech”) have enabled non-bank lending firms to proliferate on the Internet.

Other Important Changes in Credit Cards, Mortgages and Banking:  Due to growing 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.  However, certain types of credit card fees have been restricted by recent 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.

The credit card industry is evolving.  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 tech companies like Google and Apple; cellphone manufacturers like Samsung and Huawei; 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 wireless subscriber base has topped 6.9 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 leases, rent or other alternative contracts in order to be acceptable.)  Many Muslim-owned banks are competing fiercely while enjoying growth.

Total residential mortgages on 1-4 family buildings grew slightly to $9.9 trillion in the second quarter of 2015 (but down substantially from $11.25 trillion in the second quarter of 2008).

Prior to 2007, mortgage lenders had been pushing a long list of questionable 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 substantial (but steadily declining) amounts of mortgages remain delinquent.