The Bankwatch

Tracking the consumer evolution of financial services

Reintermediation underway for banking, will offer some improved opportunities for banks

In this investment commentary, B. B. & T a $137 Bn bank based in the Carolina’s is quoted talking of the re-intermediation of banking deposits. In particular he speaks of the return of deposits back into the deposit system – deposits that had existed to mutual funds and other vehicles outside of normal banks.  he points out other non banks did not have the reserve requirements of banks so were able to undercut banks on rates, and he sees that situation returning to be in the Banks’ favour.  Its an interesting perspective on what has and is happening.

Raymond James – market commentary

“We had an interesting thing for the last 20 to 25 years. We disintermediated the banking
industry as a huge amount of traditional banking loans left the banking system and went
through securitization into various conduits and other investment areas, which caused two
things to happen. One is we lost the volume and it put an enormous amount of pricing
pressure on loans because a lot of these investors didn’t have the capital and reserve
requirements that we do. And so I started making loans 36 years ago and over that period
of time we’ve lost about 300 basis points on the same kind of loans. We haven’t gotten it
all back yet. It will take a little while, but on the larger size credits, we’ve already seen 100-
plus basis point improvement just in the last three or four months.”

“The way I frame (the question) is what does the economic engine look like going forward?
Here’s an interesting thing to me, and you may not agree with this, but I think it’s rational. I
mentioned earlier this 20-plus-year period of disintermediation as huge amounts of assets
left the banking balance sheet and went into the capital markets. That’s gone for a long
time. It may be back one day, but I think it’s gone for a long time. We saw huge amounts
of traditional deposits, CD-type deposits, leave our system and go into mutual funds; and
while there’s nothing wrong with mutual funds, very sadly, particularly (for) senior citizens,
they have lost a lot of the money they were counting on to live. You are (now) seeing that
money come back in the CDs, albeit at lower rates.”

“So we’re getting more deposit inflow at lower rates. We’re getting more loan inflow at
higher rates. Spreads are improving. They will continue to improve.

Relevance to Bankwatch:

While it is clear deposits are returning to banks, and there are elements in the forecast that make sense, I would tend to believe the idea of returning to some banking nirvana of 25 years ago is a bit of a stretch – the future rarely so linear.  Following along the logic in the paper, the improvements are all predicated on the return of higher margins, which presumably assumes that the market will sit by and let that happen – obviously there will be some opportunity there, but it does not sound like a strategy to rely on customer and market inertia.

An of market opportunism example is social lending is the operation of Lending Club under regulation of SEC, and Prosper and others pending – there will be new and innovative methods of financial services being offerred that arise from this economic crisis, in ways we have not forseen.    Such opportunities will simply have a better business case to the extent that banks are earning higher margins.

Written by Colin Henderson

January 26, 2009 at 13:03

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