Jumat, 20 Juni 2008

Banking and Finance (2)

Fair Lending/Community Banks.
Clinton proposed steps to make banks lend more money and provide more services in depressed inner-city neighborhoods. On July 15 the president submitted to Congress his Community Development Banking proposal to stimulate credit flow to inner cities. The measure included an expenditure of some $382 million through fiscal 1997 to establish and expand nontraditional lenders in disadvantaged neighborhoods.
Comptroller Ludwig pressured banks through tougher enforcement of the 1977 Community Reinvestment Act, a measure designed to make more loans available to minorities living in depressed areas. The law was intended to prevent banks from accepting deposits in such areas without making loans available there. Some bankers and federal bank examiners complained that Ludwig was pressuring them to make risky loans. But evidence continued to mount that a black borrower with the same financial profile as a white borrower was more likely to be turned down for credit by a bank. A group founded by consumer activist Ralph Nader accused 49 mortgage lenders of discrimination. A study by Timothy Bates of the New School for Social Research found that black-owned construction companies were denied loans more frequently than similar white-owned firms.

Bank regulators and the Department of Housing and Urban Development instituted testing programs to uncover lending bias and said they would refer any evidence of discrimination to the Department of Justice for prosecution. In December the Clinton administration proposed tough new rules to insure compliance with the Community Reinvestment Act. Objective measurements would be used to evaluate whether a bank's lending patterns in specific neighborhoods were biased when compared with its own overall lending patterns and competitors' lending patterns, whether a bank was investing in a community's growth, and whether it was offering a full array of services. Banks that were found to be flouting the law could face fines or other sanctions.
In November, for the first time, the Federal Reserve blocked a large bank merger because of concerns over possible bias in mortgage lending, preventing Shawmut National Corporation from acquiring New Dartmouth Bank. In December the Justice Department settled its year-old lending discrimination case against Shawmut; the bank's chief executive said Shawmut would renew its application to buy the New Dartmouth Bank.
Nonbank Competition.
Despite high profits in 1993 the long-term outlook for banks looked dim because of a loss of market share to unregulated competitors like finance companies, brokerage houses, and mutual funds.
Bankers were particularly alarmed at the growth of nonbank issuers of credit cards. As of March 31, 13 of the top 50 credit card issuers were owned by nonbank companies. Citicorp continued to reign as the largest credit card issuer, with $36.8 billion in revolving credit outstanding, but the Chase Manhattan Corporation yielded second place to Discover Card Services Inc., issuer of the Discover Card, with $15.2 billion in revolving credit outstanding. Previously, Discover was the only nonbank card among the top ten. But by the end of the first quarter of 1993, Discover was joined by three other nonbanks. One of these was Household International, Prospect Heights, IL, which issued the cobranded General Motors MasterCard (every time a purchase is made with the cobranded card, a percentage of the purchase price is rebated in the form of a credit toward the purchase of a new GM car); Household International had $6.9 billion in revolving credit outstanding. The other two nonbanks were American Express Travel Related Services, Inc., with $6.7 billion, and American Telephone & Telegraph Company, with $6.6 billion. Reacting to the growth in competition, banks began looking for cosponsors of their own. Citicorp cobranded a Visa credit card with the Ford Motor Company.
As far as was legally possible, banks pursued customers who were turning to mutual funds. The Glass-Steagall Act, passed during the Great Depression, prohibits banks from underwriting funds; however, banks can sell funds underwritten by others and can serve as fund advisers, thereby reaping fees. Since the late 1980s over 100 banks have started their own mutual fund families, with the banks serving as advisers. By mid-1992 banks accounted for over 14 percent of all stock and bond mutual fund sales. In the 12 months ended June 30, 1993, banks increased the mutual fund assets they managed by 36 percent, to $190.9 billion. That outpaced the 23 percent growth recorded by the mutual fund industry overall, to $1.8 trillion in assets.
In 1993, Wells Fargo & Company permitted ATM cardholders who also owned its mutual funds to purchase additional shares, transfer money between funds, or sell shares and transfer the proceeds into a bank account. In another sign of the mutual fund push, Bankers Trust Company linked up in August 1993 with discount broker Charles Schwab Corporation to sell mutual funds to the corporate retirement-plan market. Then, in December, Pittsburgh-based Mellon Bank Corporation acquired the Dreyfus Corporation, the sixth-largest U.S. mutual fund company. Once the deal was completed, Mellon would derive 60 percent of its annual revenue from mutual fund fees rather than from interest on loans.
The increased mutual fund activity by banks worried some members of Congress; they were concerned that bank customers might not realize that funds marketed by banks were not guaranteed by federal deposit insurance funds. In October, House Banking Committee Chairman Henry B. Gonzalez (D, Texas) and Representative Charles E. Schumer (D, New York), a member of the banking panel, introduced a bill to regulate fund sales by banks. The banking industry opposed the plan, claiming it would add to government red tape already diluting industry profits.
President Clinton proposed to save $4.3 billion by having federally guaranteed student loans be made directly through the Education Department. The president said the system whereby the government paid private lenders such as banks to provide the loans was needlessly expensive for students. Protests by the banking industry did not fall on deaf ears, and the legislation that was eventually passed allowed for a test of the program: The Education Department would be permitted to make up to 50 percent of guaranteed student loans for a period of five years. In 1998, Congress would have the option of expanding the program.
Bank Mergers.
Banks' loss of market share to unregulated competitors caused a flurry of bank mergers in 1993. The third quarter of the year was the biggest deal-making period since the third quarter of 1991, when mergers were announced between BankAmerica Corporation and Security Pacific Corporation and between Chemical Banking Corporation and Manufacturers Hanover Corporation. Deals in the third quarter of 1993 totaled $6.6 billion, compared to $3.3 billion in the second quarter. The fourth quarter of 1993 featured the largest single deal since 1991, with the $3.8 billion merger of Society Corporation of Cleveland, OH, with Keycorp of Albany, NY.
BankAmerica, which cut 20,000 jobs following its 1991 merger, announced plans in late October 1993 to eliminate 3,750 more jobs, or 3.8 percent of its work force, by the end of 1994, because of the weak California economy. The new cuts were expected to save about $250 million in annual expenses.
S&L Bailout.
The government cleanup of failed savings and loan associations seemed imperiled for most of the year because of congressional reluctance to provide the Resolution Trust Corporation, the agency in charge of the bailout operation, with additional funds. Critics claimed the RTC was inefficient and inept. A report by the agency's own inspector general revealed that the accounting firm Price Waterhouse and Company, working as a subcontractor for the RTC in a San Diego thrift, had billed the agency 67 cents per copy for copying over 11 million documents at that one institution, resulting in a cost overrun of millions of dollars. As a result of such criticism, Albert V. Casey, chief executive officer and president of the RTC, resigned on April 1 after 17 months on the job. (Late in the year, after four months of waiting for the Senate Banking Committee to schedule confirmation hearings, his proposed successor, Republican real estate developer Stanley Tate, withdrew his nomination. His lack of success was attributed to a number of causes, including the disinclination of some Democratic senators to confirm a contributor to Republican campaigns.)
The Clinton administration initially sought $42 billion to complete the cleanup of failing S&Ls but agreed to accept less in the face of opposition from both the Senate and House. Late in the year a congressional committee brokered a compromise between versions of the legislation. The compromise measure finally adopted called for $18.3 billion to finish the S&L cleanup.
International Banks.
European banks, meanwhile, were still suffering from the same asset quality problems that had hobbled their American counterparts a few years earlier and from a lingering recession. Crédit Lyonnais, a French state-owned bank, turned in one of its worst performances in 20 years. Analysts said credit problems at Bank Nederland, its Dutch subsidiary, contributed to Crédit Lyonnais's problems.
A British bank, Barclays, reported the first loss in its 97-year history in March, when it was compelled to reserve 2.6 billion pounds sterling against doubtful credits and, as a result, was forced to cut its dividend.
Banks in Sweden were rocked by bad news. At the end of June the Swedish government paid $50 million to cover an interest payment missed by Swedbanka, one of Scandinavia's biggest banks. Earlier, the government had to take over and bail out Gotabanken and Nordbanken. Also in June, Italy's Ferruzzi group announced its inability to meet obligations to lenders. More than 100 banks, including some of the largest U.S. and European institutions, were unable to recover hundreds of millions of dollars in loans.
Internationally, there was much fretting by regulators about the risks of the $6 trillion derivatives market. In this market banks trade interest income produced, or derived, from securities in their portfolios, such as stocks, bonds, currencies, or commodities, to help protect themselves from interest rate fluctuations. Anxious to avoid more regulation, the Group of Thirty, a Washington, DC, think tank representing some of the biggest international banks, called for its members to voluntarily adopt more rigorous accounting standards and to make additional disclosures about their derivative activities. When the banks appeared to be ignoring the recommendations, they received a stern warning from the U.S. Federal Reserve Board that governments would act if they did not.
The movement toward economic union in Europe prompted France in July to privatize two state-owned banks, Banque Nationale de Paris, one of its largest financial institutions, and Société Nationale Elf Aquitaine, a small, retail bank. Only members of the European Community were permitted to have more than a 20 percent stake in the privatized banks, prompting protests from the United States that France was engaging in protectionism.
Cross-border acquisitions also picked up in Europe. France's Crédit Lyonnais, the world's eighth-largest bank, acquired Bank für Gemeinwirtschaft, a German bank. Commerzbank, another German institution, acquired Paris-based Caisse Central de Réescompte.
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