Bankers’ Hours: Banking is riskier than ever, but no less lucrative
You’ve heard a lot from this corner about how miserable it is to be in banking today.
If you’re a banker, new regulations preclude you from making many good loans (although this is harder on your customers than it is on you). Your attorney is counseling you to get out of consumer lending entirely, which you can’t do, because of your charter and the Federal Deposit Insurance mandate that you serve your consumer customers.
Innocently running afoul of the reams of regulations coming out of the Dodd-Frank Act and the Consumer Financial Protection Bureau can result in large civil money penalties for your bank or, even more painful, for you personally.
Without really meaning to, you can violate a law that carries criminal penalties, whereupon you can face indictment for a felony.
Why would anybody willingly be in such a business, placing themselves in harm’s way every day? Yet, contrary to what we may hear, few leave and many would love to jump in the banking pool if only the FDIC would grant new charters. Kind of counterintuitive, right?
The motivation is simple, the reason obvious. You can still make an awful lot of money in banking because you get most of the commodity that you sell for nothing.
Banks pay very little interest on the money they get from the public. The bulk of deposits are in non-interest-bearing checking accounts. Look at virtually any bank income and expense statement, and you’ll find that interest expense is a very small item, and interest income is a very large one. On any business I&E report, cost of goods sold is a very significant line item: not so with most banks.
Imagine a service station operator not paying for the gas flowing from the pumps, or a utility getting free natural gas to sell to consumers, or a super market with no wholesale purchasing cost.
Of course, there’s a lot of expense in taking care of the commodity or merchandise after it’s acquired, and then the cost of sales as it’s passed on to the customer, and banks spend a lot on the plethora of minutia required to warehouse and dispense money. Deposit insurance isn’t free, and regulatory compliance is very expensive. Still, if a bank runs a tight ship, and avoids problem loans, it’s almost impossible to actually lose money in the business.
So if you’re a banker, why not bypass the FDIC, get Big Brother out of your hair and just rake in the bucks? Well, there wouldn’t be any bucks to rake in. Money rolls in from depositors because they need a place to put it where they can get it back. Federal Deposit Insurance makes U.S. banks the safest place in the world for money; for the same reason that China buys U.S. Treasury Securities: The deposits and the T-Bills are backed by the full faith and credit of the United States.
The kitchen can get pretty hot for a banker these days. So for those who choose to stay in it, some of the heat can be mitigated at the end of the day by opening a cold beer and contemplating the bottom line.
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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