This must be a good time to be in the lawn-chair business. Night after night, it seems, the television news programs have shown the worried customers of one beleaguered financial institution after another queued up outside its front door -- and sitting on their lawn chairs.
Well, we exaggerate a bit, perhaps. But with record numbers of post-depression bank failures, and phrases like ``bank holiday'' bubbling up from the swamp of memory and coming back into use, people are beginning to wonder, just how sharp is the management of the nation's banks?
The quick answer seems to be, sharp enough, thank you.
But two important distinctions must be made:
Between commercial banks on one hand and savings institutions on the other.
And between the kind of ``sound management'' that merely keeps a bank afloat and the kind that moves it along a clearly defined strategic path.
After all, the board and the stockholders of an industrial company want to see more than just its survival; they want to see increased earnings, higher market share, new products. Banks are having to learn this same market discipline. With the deregulation of interest rates and new competition from everyone from Sears, Roebuck to Merrill Lynch, banks have moved from an environment in which they are virtually guaranteed success to one in which there is opportunity for new successes -- and also for failure.
The lessons are coming hard and slowly in some cases.
Banking consultant Charles K. Rourke, president of the Organization Analysis Group Inc., in Boston, tells of standing out on the sidewalk, in front of two savings banks side by side, with the president of one of them. `` `Joe,' I asked him, `why would anyone come to your bank instead of the one next door?' He replied, `I have no idea.'
``Five years later the FDIC came in and removed him and the chairman and reorganized the bank.''
David Cates, a banking consultant in New York, says that there are only some 10 to 15 percent of the nation's banks where ``management is less than adequate -- either because they're extra greedy or extra dumb.'' He hastens to add, ``Not that they're going to fail -- it's just that the risk factor is higher.''
By less than adequate management in this context, he means ``risk control.'' As far as strategic planning goes (see our distinctions above), Mr. Cates says, ``I guess the balance is that, well, more than half have thought out their place in the world. . . . [the rest] are not all that clear on their position.''
Phillip White, associate professor of marketing at the University of Colorado at Boulder, says, speaking strictly of the banks, that ``given the changes in the environment, they're pretty well managed. ``Not as many banks as we'd like have a strategic plan -- but that [kind of planning] is starting to develop. The strategic plan hitherto has been `business as usual.' ''
Verlyn Richards, professor of finance at Kansas State University, says there are well-managed banks of all sizes -- and banks of all sizes that have been ``not as quick as you'd like'' to pick up on changes.
Among banks that have identified internally and then articulated publicly a clear strategy, William Welsh, a banking industry analyst at Sanford Bernstein & Co. in New York cites the ubiquitous Citibank, with its push to the consumer market; Wells Fargo, in San Francisco, with a consumer and small-business focus; and Bankers Trust and Morgan Guaranty, which have focused on large-scale corporate and investment banking.
Cates stresses that being strategically unsuccessful does not mean a bank will suddenly collapse. He notes, though, that a ``gradual deterioration'' can be expected.
There were 79 bank failures in the United States last year, he notes, and 400 new banks chartered. The ``economic radiation'' of the failure of a small bank is ``very low,'' he observes. The failure of Continental Illinois Bank is ``unprecedented and without parallel'' among US banks, says Cates, who claims an excellent track record in spotting problem banks.
The nation's savings-and-loans are in a pinch, however. ``If thrifts had to submit to the same accounting and regulatory standards as the commercial banks, well over one-third would be deemed insolvent to the point of closing,'' Cates says. Moreover, the Federal Savings and Loan Insurance Corporation is insolvent, ``and everybody knows it.''
Consultant Rourke says banks must be more aggressive, by which he doesn't mean they should take on riskier loans. Instead, they must learn more about the market, defining a niche and getting a realistic sense of costs. He tells of a bank that was spending $350,000 in salaries alone for its economics unit, without any clear idea who made use of the department's research.
Banks tend to be oriented to their own systems, not to their customers. Mr. Rourke tells of meeting with some bank officers who complained, ``Why do people always have to come in at their lunch hour? Don't they know we're busy?''
``So this was just a community service,'' says Rourke. ``But banks have got to think tough.''
The ``personnel issue'' is something else the banking industry must face. Professor White suggests that the nation's banks will be adequately served by the pool of talent flowing in their direction as long as the trends toward interstate banking and consolidation continue. But if we continue to have as many banks as we do now, each needing its own front office and strategic planners, ``No, there won't be enough'' bright people for the banking industry.
Charles Meiburg, professor of business administration at the Darden School of Business at the University of Virginia, says, ``Banks have a thing about the way they compensate people.'' In other words, they don't pay much, and given their salary structures, they often feel the only way to pay a good loan officer more is to promote him -- to a management position for which he may not be qualified.
Professor White concurs: ``There's no question banking has not had to invest lots of money to attract people -- they've had a guaranteed profit margin. You didn't have to have the best and the brightest. . . . The personnel issue is of continuing concern.''