2013 is shaping up to be a noteworthy year for banking as our economy recovers from the effects of the Great Recession. The outlook for the economy has brightened as job losses have stabilized with some jobs returning in the manufacturing sector. Housing has bottomed, exports have strengthened, and consumer households have recovered from record high debt levels, with household debt at its lowest level since 1993.
Across the nation and locally, community banks are emerging from the Great Recession with balance sheets that demonstrate historically high levels of capital as well as core deposits. Banks are poised in 2013 to provide the fuel for household and small business growth, but policy uncertainty by our national government has hampered the emergence of a consistent upward trend of confidence in the economy by both consumers and business.
Banking this year also faces the retooling of its traditional business model as the most comprehensive banking reforms in 70 years have brought forth new regulations and compliance requirements. Stakeholders are demanding improved enterprise risk management practices designed to identify and limit risks that could threaten the stability of an individual bank as well as the banking system. At the same time, retail and commercial bank customers have adopted preferences for new service channels as our country embraces technological advancements in daily activities.
Banking 2.0 Begins in 2013
To be successful in the future, banks will need to shift business models to address image repair and new strategies and structures driven by permanent changes in customer preferences. A starting point is the poor public perception of banking driven by the excesses of Wall Street. Community bankers work on Main Street and generally did not participate in the highly unpopular TARP program designed to shore up bank capital as the financial meltdown unfolded in 2008. Our best defense against the negative public view of banking will be to continue our community engagement through lending to household and business, and through our support for community and faith- based organizations.
In the 21st century, community bankers will also need to shift our organization structure so that we remain relevant and drive sustainable performance that differentiates community bankers from larger, impersonal banking companies. Community banks will maintain our commitment to serving the credit demands of our consumer and business customers. At the same time we will take advantage of technology to improve customer service by meeting the ever-increasing demand of mobile savvy customers for 24/7 access to banking through such services as mobile payments, mobile wallets, remote bill pay applications, and remote deposit capture.
Public Policy Certainty
Consumer and business confidence has ebbed and flowed over the past several years as our national leaders, rather than working together to find common sense answers to the challenges of America’s fiscal health, have spurned legitimate compromise of competing public policy positions. As a result, neither consumer nor business customers have been energized to expand their horizons by accessing bank available credit facilities. Community banks succeed when our customers borrow; and with our strong capital positions, we have the capacity to meet anticipated demand once debt and fiscal policy direction has been firmly resolved.
In the aftermath of the financial meltdown, an avalanche of new banking regulations will add new costs for community banks. The intention of many of these regulations is to limit the systemic risks to the economy by the practices of our country’s large banking institutions — particularly the seven banks that now hold more than 50% of domestic deposits. Unfortunately, these new regulations are being applied across the board to all banks and operating costs will rise at community banks that, unlike our larger competitors, do not have the operating scale to readily absorb these additional costs.
Increased regulatory requirements may cause the unintended consequence of many smaller banks exiting the business to the detriment of their communities. The FDIC reports that nearly 40% of all small business lending is provided by banks with less than $1 billion in assets and about 70% of all small business agricultural lending is likewise made by banks under $1 billion in assets. Any substantial consolidation of smaller banking companies due to regulatory burden would clearly have an adverse impact on the communities they currently serve.
Banking on Northwest Indiana
Not a single bank in Northwest Indiana failed during the Great Recession. Like many of our customers we were buffeted by ill winds, but we are wiser for the experience and stronger, too. As the economy recovers, your community banks are well positioned to meet the challenges of today just as we were able to overcome the challenges of the recent past. Your community bankers are cautiously optimistic about the future and bullish on the prospect of doing business in Northwest Indiana.