In the 1990s, the American banking industry is operating in an environment that a leading expert describes as "hostile."
John F. Kooken, vice chairman and CFO, Security Pacific Corp., discussed "Challenges to the Banking Industry in the 1990s" with conferees at the Utah State University 21st Annual Banking Seminar this week."The reaction of the rest of the world to conditions in the banking industry can best be described as `hostile,' " said Kooken. "We see this in the attitudes and public statements of regulators. We see this in statements by congressmen. We see this in the press.
"Hardly a day goes by that there is not an article dealing with the problems of the banking industry or the problems of the real estate markets and their potential impact on the banking industry," Kooken said.
Speaking of longer-term trends rather than the shorter-term question of whether the United States is entering a recession, he said, there is a feeling the nation face slower economic growth.
An important implication of the federal reserve's resolve to lower inflation rates is that the banking industry will face continuing pressures on credit quality.
In past cycles, Kooken said, inflation has solved a lot of banking's credit problems, particularly when they were concentrated in the real estate area. "We will not have nearly as much benefit from this factor in the next five years."
Slow asset growth combined with the possibility of lower interest rates and the resulting pressures on margins will lead to slower growth in net interest income than we have experienced in the 1980s," Kooken said.
Breakdown of regulatory barriers has had impact on the amount and intensity of "non-bank competition in many of the products and services that we offer, and at the same time, the level of foreign bank competition has increased."
Kooken said, "In my own state, California, foreign banks have somewhere around 25 percent of the market. This increased competition from outside our industry is added on to a very fragmented and decentralized U.S. bank system which for many years had geographical restrictions that limited competition in specific markets.
All this will change even more in the 1990s as the geographical barriers to expansion continue to come down, leading to a significant increase in the number of competitors that may operate in any one market," Kooken said.
The Henry Kaufman Distinguished Lecturer told Utah's bankers that there are ways U.S. banking can "improve the very weakened state of our industry at this time.
"Our individual organizations must have a much more focused business strategy than we have had in the past, focusing on those parts of the business where we have competitive advantage or other business strengths," Kooken suggested.
He said a more disciplined approach to management will need to be taken, stressing expense management.
If we are going to compete effectively in the '90s, then industry as a whole, and our individual organizations, are going to have to reduce the level of our operating expenses.
"Consolidation is clearly one way to accomplish this objective," Kooken said.