Banking Really Is Simple

When I became a commercial banker, banking was a simple business. We took deposits in and paid a modest interest on them. Then, we lent out a portion of the deposits at a much higher interest rate. We paid for the business with the difference and anything left over was profits for the shareholders. If we were really good at our business, we could be on the golf course with a customer by noon and home for a family dinner.

Perfect.

What could be a better business model?

One of the first things I learned about lending was that a smart banker would spread the risk of a loan turning bad around as far and as wide as was reasonable. This way, we were protected if a loan turned bad because a loss on the loan would not be catastrophic for the bank.

I should point out that no honest, competent banker ever knowingly made a bad loan. All commercial bankers, me included, have made a good loan that turned sour. Life happens; you learn to accept this and learn from the experience and hope you don’t repeat your mistake.

We knew our customers because they came from the local community. And, our customers knew us.

If banking is so simple, why is there a mess in the financial services industry?

I think the mess exists because bankers lost their way and forgot their traditional values that have worked for hundreds of years. We started lending money to customers that we didn’t really know all that well. Some of us followed those self anointed industry experts who said they could lead us to the lending Promised Land.

Remember Walter Wriston of Citibank?

Most of you probably don’t remember him or even know who he was. I think of his famous statement about “countries don’t go broke.” It makes me smile. Then Mexico went into the toilet and Citibank was on the ropes. Wriston retired and John Reed cleaned the mess up. A lot of banks got burned on lending to sovereign and foreign borrowers they did not truly know well, if at all.

They forgot their traditional values of lending to people they knew.

Bankers are like lemmings in some respects; we tend to follow trends because everyone else is doing this new practice so it must be safe. Other industries have acted like lemmings as well.

So where does that leave the blog and where will it go from here?

I want to explore the coming mess in banking that is likely to burst later this year or early next year. I also want to talk about how small business owners can manage their financial institution relationship.

Maybe even answer some questions while I am at it.

What, you didn’t know there was a looming banking mess on the horizon? Then read my next post, in a day or so, about it and how to protect yourself.

Be well and stay happy.