Are banks private sector companies or public utilities?
| By Richard X. Bove, vice-president, equity research/financial sector, Rochdale Research |
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Bank multiples at risk
There was a spate of articles in the press today concerning banking. Most of these articles had a negative slant related to the industry. This is a problem for bank stocks. The reason is clear. Investors no longer feel a compelling need to short or sell these issues (other than Bank of America. However, there is a definite sense that there is too much risk to get involved in an industry which the government is clearly attempting to nationalize on a de facto basis— i.e., the government is using regulations to control the industry’s activities. In essence, the government wants to run the industry without actually owning it. This is not appealing to investors.
Core issue
At its core, the basis of the anti-bank group is that banks are a public utility. They should be price controlled and offer products for lower income households even if this results in losses. Moreover, there is a core belief that banks should not be allowed to make profits. Here are some quotes from The New York Times:
• New York State Attorney General Eric Schneiderman wants: banks to be “Limiting the size of fees … requiring banks to offer low-cost checking and savings accounts for low-income customers.”
• Sarah Ludwig of the Neighborhood Economic Development Advisory Project argues: “When did banks receive the divine right to make obscene profits? … banks should not be permitted to charge exorbitant consumer fees.”
• Rashad Robinson of the ColorOfChange wants to know: “… why should we expect consumers to be able to pay exorbitant fees for basic services that banks used to offer free of charge?”
• Chi Chi Wu of the National Consumer Law Center states: “We hope the Consumer Financial Protection Bureau will rein in these harmful practices [bank fees for a variety of products].”
The participants in The New York Times discussion strongly believe that banks were bailed out at the expense of Main Street and that taxpayers lost a fortune as a consequence.
There is no understanding that if the banks failed then millions of businesses across the country would have had their loans called causing them to fail driving unemployment higher.
No one even thinks about asking the question as to why every country in the world protects its banking system. The answer, of course, is because the banking system holds the key to the health of middle to small business and the people they employ. There is even less understanding that taxpayers made over $150 billion on the investment made in banks by the Treasury.
What is evident is that the outcry against the industry has a new tool with which to bash banks. It is the Consumer Finance Protection Bureau. If this federal agency takes the approach that bank fees must be set by the government, the industry will be in trouble. Investors simply do not want to play in this market.
At its core, the basis of the anti-bank group is that banks are a public utility. They should be price controlled and offer products for lower income households even if this results in losses. Moreover, there is a core belief that banks should not be allowed to make profits. Here are some quotes from The New York Times:
• New York State Attorney General Eric Schneiderman wants: banks to be “Limiting the size of fees … requiring banks to offer low-cost checking and savings accounts for low-income customers.”
• Sarah Ludwig of the Neighborhood Economic Development Advisory Project argues: “When did banks receive the divine right to make obscene profits? … banks should not be permitted to charge exorbitant consumer fees.”
• Rashad Robinson of the ColorOfChange wants to know: “… why should we expect consumers to be able to pay exorbitant fees for basic services that banks used to offer free of charge?”
• Chi Chi Wu of the National Consumer Law Center states: “We hope the Consumer Financial Protection Bureau will rein in these harmful practices [bank fees for a variety of products].”
The participants in The New York Times discussion strongly believe that banks were bailed out at the expense of Main Street and that taxpayers lost a fortune as a consequence.
There is no understanding that if the banks failed then millions of businesses across the country would have had their loans called causing them to fail driving unemployment higher.
No one even thinks about asking the question as to why every country in the world protects its banking system. The answer, of course, is because the banking system holds the key to the health of middle to small business and the people they employ. There is even less understanding that taxpayers made over $150 billion on the investment made in banks by the Treasury.
What is evident is that the outcry against the industry has a new tool with which to bash banks. It is the Consumer Finance Protection Bureau. If this federal agency takes the approach that bank fees must be set by the government, the industry will be in trouble. Investors simply do not want to play in this market.
“Break up the banks”
The American Banker newspaper, that stalwart supporter of Wal-Mart as the best American bank innovator, ran an article under its BankThink banner entitled “The Economy Needs a Big-Bank Break-Up.” Once again, the question might be asked as to whether the writer ever thought about the reason that big banks dominate the financial systems of every major western country. Why has there not been a proliferation of small banking and financial institutions?
The answer might have something to do with economics. In essence, over the decades in every major country in the world large banks have emerged to take a dominant position in financial dealings. The reason may be because a multi-disciplinary bank competes best in a modern economy.
The American Banker newspaper, that stalwart supporter of Wal-Mart as the best American bank innovator, ran an article under its BankThink banner entitled “The Economy Needs a Big-Bank Break-Up.” Once again, the question might be asked as to whether the writer ever thought about the reason that big banks dominate the financial systems of every major western country. Why has there not been a proliferation of small banking and financial institutions?
The answer might have something to do with economics. In essence, over the decades in every major country in the world large banks have emerged to take a dominant position in financial dealings. The reason may be because a multi-disciplinary bank competes best in a modern economy.
Conclusion
There were articles in The Financial Times and Rupert Murdoch’s The Wall Street Journal also excoriating banks--one over big banks pushing little banks around; the other over the debate on bank capital requirements. This constant flow of negative views on the banking industry is having an impact on bank stock multiples. The fact that they are being kept at relatively low levels impacts the access of these companies to new funds. This harms potential economic growth.
There were articles in The Financial Times and Rupert Murdoch’s The Wall Street Journal also excoriating banks--one over big banks pushing little banks around; the other over the debate on bank capital requirements. This constant flow of negative views on the banking industry is having an impact on bank stock multiples. The fact that they are being kept at relatively low levels impacts the access of these companies to new funds. This harms potential economic growth.
About the author
Richard Bove, a distinguished industry veteran, covers the financial services and banking sector. Bove’s research has received recognition from a number of industry sources over the years. He has appeared over 500 times on the popular business channels. He is also extensively quoted in the print media. From time to time, Bove has been contacted by the banking regulators up to and including the White House for his thoughts on the industry. His work has been noted internationally in Europe, Asia, and Latin America.
The report is reproduced with Mr. Bove’s permission. Copyright 2012 Rochdale Securities LLC.
Richard Bove, a distinguished industry veteran, covers the financial services and banking sector. Bove’s research has received recognition from a number of industry sources over the years. He has appeared over 500 times on the popular business channels. He is also extensively quoted in the print media. From time to time, Bove has been contacted by the banking regulators up to and including the White House for his thoughts on the industry. His work has been noted internationally in Europe, Asia, and Latin America.
The report is reproduced with Mr. Bove’s permission. Copyright 2012 Rochdale Securities LLC.
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