Banking And Finance (1)

Archives consist of articles that originally appeared in Collier's Year Book (for events of 1997 and earlier) or as monthly updates in Encarta Yearbook (for events of 1998 and later). Because they were published shortly after events occurred, they reflect the information available at that time. Cross references refer to Archive articles of the same year.
1993: Banking And Finance
Historically low interest rates in 1993 helped the U.S. banking industry achieve record profits and provided an escape hatch for debt-laden consumers. Rates on 30-year mortgage loans fell to under 7 percent, the lowest since the 1960s.
There was a downside to the good news, however. Congress appeared unable to pass legislation needed to modernize the banking industry, possibly setting the stage for a round of industry consolidation and failures later in the decade. And low yields drove savers who usually relied on bank accounts backed by government guarantees into riskier instruments such as mutual funds in order to maintain adequate returns. Returns on six-month certificates of deposit dropped below 3 percent. Five-year CD rates fell below 4.5 percent in October. Meanwhile, the assets of stock mutual funds rose 22 percent during the first half of the year, to $580.4 billion, and bond fund assets were up 16 percent, to $673.1 billion.
Defendants in various banking scandals made news again during the year, including Clark Clifford and Robert Altman, both of whom had been charged in 1992 in connection with the Bank of Credit and Commerce International (BCCI) case.
In Europe the year saw many banks beleaguered by credit problems and the effects of recession.
Prime Rate.
Slow economic growth kept interest rates in the United States at their lowest levels since the 1950s. On October 18, Morgan Guaranty Trust Company cut its prime rate, the rate it charges to its best customers, to 5.5 percent, down half a percentage point. A Morgan spokesman said the bank decided on the hefty cut because there was growth in loan demand, low inflation, and a spread of three percentage points between the Federal Reserve Board funds rate (the rate at which banks can borrow money overnight) and the prime — a very big spread by historical standards. Analysts had been expecting banks to cut the prime rate, which had lingered at 6 percent since July 1992, but only by a quarter of a percent. A brief sell-off of bank stocks followed Morgan's action, as analysts predicted a drop in bank profits because of lower rates on loans. However, most of the rest of the banking community declined to follow Morgan's lead.
Bank Profits.
Overall, the more than 11,000 commercial banks in the United States enjoyed a banner year in 1993. The industry reported $10.4 billion in earnings during the second quarter, just $455 million below the record earnings of the first quarter. The third quarter saw a new record as earnings reached $11.5 billion. For the first nine months of 1993 banks earned $32.6 billion, $8.5 billion more than in the corresponding period in 1992. Citicorp, the largest U.S. banking company, saw its third-quarter earnings triple to $528 million, a remarkable performance for a bank believed to have been on the Federal Deposit Insurance Corporation's list of troubled banks in 1991.
As a result of the strong earnings bank stocks generally outpaced the market, and shareholders saw dividends in the first half of the year mount to $8.7 billion, 50 percent more than in the same period of 1992.
Federal Deposit Insurance Fund.
The surge in profits reduced strains on the Federal Deposit Insurance Corporation's Bank Insurance Fund. In August 1993 the fund reported a balance of $6.8 billion and a reserve ratio of 35 cents for every $100 of insured deposits. At the end of 1992 the fund had reached negative $100 million. In addition, during 1993 the FDIC was able to repay the U.S. Treasury a $2.5 billion line of credit it had requested in 1991, when the outlook for banks was far more dismal.
Many banks that had been in danger of failing recovered because of the low interest rates. By December 15, 1993, 42 banks with $3.8 billion in assets had failed, compared to 120 banks with $44.2 billion in assets the previous year. The number of troubled banks was down by 125 in the third quarter of 1993, for a total of 664. The FDIC estimated total costs to the fund for the year at $500 million, compared to $7 billion in 1991 and $4.7 billion in 1992. Total assets at problem banks dropped by $75 billion in the first nine months of 1993, to $379 billion.
Because of the turnaround the FDIC estimated that it would reach its congressionally mandated reserve ratio of $1.25 for each $100 in deposits as early as 1996. Earlier estimates had the fund reaching the required level in 2002.
Consumer Debt.
The low interest rates also enabled consumers to strengthen their balance sheets. With rates for 30-year mortgages under 7 percent for the first time in nearly 25 years, many people refinanced mortgage loans and used the savings to pay down more expensive debt. They also used home equity loans, with their tax-deductible interest rates, to replace other forms of borrowing. Data published by American Banker in June showed that credit card loans at commercial banks fell in 1992 for the first time since 1981. Total card loans outstanding fell 1.9 percent, to $136.4 billion. Mortgage loans rose 8.2 percent, to $390.1 billion, and home equity loans rose by 4.3 percent, to $73.3 billion.
Credit Crunch.
Lawmakers, especially those from the depressed New England states, were angry that banks were not making more new loans in the face of record profits. They were especially disturbed by reports that small businesses in their states could not secure lines of credit. Banks blamed the situation on weak customer demand because of the soft economy, new sources of corporate financing, and burdensome laws passed by Congress in 1991 in reaction to a spate of bank failures. (These laws require banks to maintain very high levels of capital, thus reducing funds that would otherwise be available for loans.)
Surveys by the National Federation of Independent Business showed that borrowing by its 600,000 members was at a 20-year low because of concerns about the economy. As a result, President Bill Clinton announced a credit crunch initiative on March 10, when he introduced proposed new banking regulations meant to reduce paperwork and give bankers incentives to lend once again. Comptroller of the Currency Eugene A. Ludwig, regulator of national banks, established an appeals process for bankers unhappy with the grading of loans by federal bank examiners. Ludwig, the de facto head of the FDIC during 1993, also limited that agency's ability to examine banks regulated by the Office of the Comptroller of the Currency. This move, although unpopular with the FDIC, was praised by bankers, sometimes subjected to multiple examinations by federal regulators in a given year.

American Express Company (2)

IV
INTERNATIONAL BANKING SERVICES
During World War I (1914-1918) the U.S. government nationalized and consolidated express deliveries on American railroads, eventually forcing American Express to discontinue its express business in 1918. In an effort to maintain steady revenues, American Express diversified by offering international banking services in 1919. After steady but relatively modest overseas growth during the 1920s and 1930s, the company dramatically increased the number of its offices around the world during the late 1940s and 1950s.
V

AMERICAN EXPRESS CARD
In 1958, eight years after Diners Club came out with the first credit card that could be used at a variety of establishments, American Express introduced its own credit card. The American Express credit card offered cardholders the convenience of being able to buy goods and services without needing cash at the time of purchase. The company generated revenues by charging cardholders an annual fee and by receiving a small percentage of card purchases from participating businesses. American Express did not charge cardholders interest for using the card, but it required them to pay their balances in full each month. Within three months of the card’s introduction, half a million people became American Express cardholders. In less than ten years, 2 million people carried American Express credit cards and annual charges on those cards exceeded $1 billion.
VI

DIVERSIFICATION
During the 1960s, 1970s, and early 1980s American Express grew into a global financial giant, acquiring a number of companies, including Fireman’s Fund Insurance Company in 1968 (which it sold in 1985) and the brokerage firms Shearson Loeb Rhoades Inc. in 1981 (which later grew into Shearson Lehman Brothers Holdings Inc.), Investors Diversified Services in 1984, and E. F. Hutton in 1987.
In 1987 the company introduced the American Express Optima credit card to compete with the growing popularity of cards issued by competitors MasterCard and Visa. Unlike its original American Express credit card, the Optima card did not require cardholders to pay their balances in full each month. Instead, like MasterCard and Visa, the Optima card allowed cardholders to pay balances in installments, plus interest.
VII

RECENT DEVELOPMENTS
In the late 1980s and early 1990s a downturn in the U.S. economy, coupled with increased competition from other credit card companies, led to a sharp decrease in earnings for American Express. In 1991 the company initiated a major reorganization at a cost of $110 million. At the same time American Express invested $155 million in a reserve to cover expected losses from its various credit lines.
Harvey Golub took over as chairman of American Express in 1993. Golub sold many of the company’s holdings and cut millions of dollars in costs. Earnings at the company rose steadily during the mid-1990s, as American Express broadened its credit card business, strengthened its investment-services group, and expanded its international business holdings. The number of American Express cardholders grew from 26 million in 1993 to 59 million in 2001.
Microsoft ® Encarta ® 2007. © 1993-2006 Microsoft Corporation. All rights reserved.

Visa International

I INTRODUCTION
Visa International, credit card and payment system company based in Foster City, near San Francisco, California. Visa is the world’s largest consumer payment company, with more than one billion cards issued, more than $1.8 trillion in transactions annually, and more than half of the world’s market in transactions. Visa is collectively owned by more than 21,000 member financial institutions around the world. These institutions issue Visa cards, and each establishes the terms that it will offer to consumers, such as rates and fees.

II ORIGINS
Visa traces its roots to 1958, when Bank of America, based in San Francisco, issued the BankAmericard (see BankAmerica Corporation). At the time, many banks in the United States offered charge cards, or cards that enabled consumers to charge goods and services to an account. Banks required cardholders to then pay their account balances in full each month. Unlike charge cards, the BankAmericard offered cardholders credit privileges, so they could pay their balance over a longer period of time in increments, plus interest. Bank of America licensed the card throughout California and eventually in other states as well.
The BankAmericard suffered from transactions problems and fraud during the early 1960s because of unreliable interchange systems between Bank of America and other banks licensed to issue the card. In 1968 Dee Ward Hock, an executive of the National Bank of Commerce in Seattle, Washington, headed a committee of BankAmericard licensees that was formed to resolve the problems among credit-card issuers. Two years later Hock was instrumental in creating National BankAmericard Inc. (NBI), a consortium of BankAmericard licensees designed to conduct more reliable transactions between the banks. NBI bought the domestic bankcard system from Bank of America, and Hock became the head of NBI. By 1970 the BankAmericard and its biggest competitor, Master Charge (later MasterCard), were offered nationwide, and most banks had eliminated their own bankcard programs to join one or both of the national systems.

III VISA CARD INTRODUCED
In 1974 Hock formed IBANCO, which took over administration of BankAmericard’s foreign operations. In 1977 Hock changed the name of the BankAmericard to the Visa card. NBI became Visa U.S.A. and IBANCO became Visa International. Visa International Incorporated became the umbrella organization for Visa’s business units. Visa International and Visa U.S.A. share corporate headquarters in Foster City.

IV GROWTH
In 1977 MasterCard held 60 percent of the bankcard business, compared with 40 percent for Visa. By 1983 those percentages were reversed, making Visa the leading U.S. credit card. Credit-card use expanded dramatically in the 1980s, and Visa continued to dominate the market. Visa had 56 million cardholders worldwide in 1979, but that figure rose to 220 million ten years later.
Credit-card use continued to grow in the 1990s as businesses ranging from supermarkets to health care providers began accepting payment with cards. Visa also offered premiums, such as airline discounts, for using its card. The number of Visa cards worldwide increased from 255 million in 1990 to more than one billion in 2000. The company’s revenues grew from $720 million in 1990 to $1.8 billion in 2000.
Of the more than $1.6 trillion in credit-card transactions worldwide in 1996, 55.8 percent used a Visa card, making it the worldwide leader in the credit-card industry.
Microsoft ® Encarta ® 2007. © 1993-2006 Microsoft Corporation. All rights reserved.

CREDIT CARD, DO YOU FAMILIAR WITH IT?

Credit Card, card that identifies its owner as one who is entitled to credit when purchasing goods or services from certain establishments. Credit cards originated in the United States in the 1930s; their use was wide-spread by the 1950s. They are issued by many businesses serving the consumer, such as oil companies, retail stores and chain stores, restaurants, hotels, airlines, car rental agencies and banks. Some credit cards are honored in a single store, but others are general-purpose cards, for use in a wide variety of establishments. Bank credit cards, now also in use in Europe, are examples of the general purpose card. Establishments dispensing almost every form of product or service are honoring such cards, and it is predicted that credit cards might some day eliminate the need for carrying cash.
When a credit card is used, the retailer records the name and account number of the purchaser and the amount of the sale, and forwards this record to the credit card billing office. At intervals, usually monthly, the billing office sends a statement to the cardholder listing all the charged purchases and requesting payment immediately or in installments. The billing office reimburses the retailer directly.
Most of the work involved in credit card operations is now handled by computers. Charges for the use of a credit card are sometimes paid directly by the cardholder, and sometimes borne by the retail establishments that accept them. In the latter case, the cost is absorbed into the price of the merchandise. Department stores usually charge interest to credit customers who do not settle their bills within a month, but certain credit plans do not charge interest until a bill has been outstanding for several months. Interest rates for overdue balances are regulated by state law. A continuing problem involved in the use of credit cards is the ease with which they can be used fraudulently if stolen or lost, although the liability of the owner is limited.
Microsoft ® Encarta ® 2007. © 1993-2006 Microsoft Corporation. All rights reserved.