Over the next 25 years, the U.S. economy will reinvent itself by returning to its agricultural roots. The big banks will stagnate in size. Banking as a whole will contract. Superregionals are coming back.
Those are just some of the predictions for the year 2036 made by five daring and highly knowledgeable panelists during a 90-minute roundtable discussion with American Banker on Aug. 3.
Forecasting conditions a quarter century from now is a formidable challenge. None of the panelists — two ex-regulators, a former banker, an analyst and a historian — predicted the stock market crash that would occur a week later.
Undaunted, they also projected that the financial system will suffer a new crisis every seven years or so; identified a host of global threats; and — good news, branch managers — reaffirmed the viability of the branch despite the march of technology.
This year marks American Banker's 175th anniversary, and the topic of the panel was inspired by a feature we ran in 1986, asking bankers to envision their industry in 2011.
The discussion in August 2011 said as much about the recent past and our present fears as it did about the future.
In 2036, the panel agreed, the U.S. will still be an economic power, but how powerful relative to China, India, Brazil and other nations was a matter of debate.
"I still think that we will be the most powerful country in the world, but not to the same degree that we are today," said William R. Rhodes, president and chief executive of William R. Rhodes Global Advisors and a former senior vice chairman and international officer of Citigroup Inc.
Meredith Whitney, the CEO of Meredith Whitney Advisory Group, said the rise of other powers will provide the U.S. economy the spark it needs to reinvent itself. They will need an outside source of food to feed growing populations, she said.
"The U.S. has the opportunity to become the equivalent of the Saudi Arabia of food," said Whitney, an analyst who rose to prominence in 2007 by making what turned out to be a presciently bearish call on Citigroup shares.
Banks in recent decades had concentrated their growth on the East Coast and West Coast, overly exposing themselves to the collapse of the housing market in those areas, she said in our roundtable discussion. Banks that serve, say, the Midwest could have a leg up. "The growth will be in what I characterize as the emerging markets of the United States, which is the Rust Belt, the Green Belt, if you will."
With globalization will come even more competition for U.S. banks. "You follow your clients overseas. That's how we got to be international," said Rhodes, the author of a recent memoir called "Banker to the World."
"This is what the Japanese, the Indians, the Brazilians and others are starting to do. I think we're going to see a whole change in … the world banking system." Panelists generally agreed that financial crises would occur with some regularity, though some said it was hard to foresee one of the magnitude of the 2008 meltdown being repeated in the next 25 years.
"I would say financial crises have replaced the old recession cycle," said Charles Geisst, a professor of finance at Manhattan College and the author of "Wall Street: a History" and other books. "Every seven years we would look for a recession after a boom. … I think now we're seeing financial crises."
Many were skeptical that the Dodd-Frank Act or other recent policy moves would be sufficient to forestall future blow-ups. Inequities in supervision among world markets, and nonbanks that expose cracks in the new rules pose the biggest threats, several panelists warned.
"The whole shadow banking area, I think is a real problem in this country and around the world," Rhodes said.
The problem, several said, will come — like with the high-risk mortgage products of the last decade — when commercial banks follow nonbanks into the abyss.
"When you have higher levels of regulation overall, there will be business that flows to the nonregulated sector and you will create incentives for banks to find a way to link in to the nonregulated sector, which really creates the potential for avoiding some of the regulatory strictures unless the regulators really stay on top of that," said William Rutledge, a managing director of Promontory Financial Group and a former executive vice president of supervision at the Federal Reserve Bank of New York.
The panelists said future generations of bankers would forget crucial lessons of the recent meltdown, but some were more optimistic than others.
"Memory will fade and some of the people most involved will stop being as active," Rutledge said. "But what's critical is how much gets institutionalized in response to the change — what gets built into the overall financial architecture, resolution mechanisms, approaches that countries have to deal with problem situations, [and] how much gets institutionalized at individual firms."
They sketched a pretty clear picture of the profiles of banks in 2036, too.
Mark Olson, co-chairman of Treliant Risk Advisors and a former Federal Reserve Board governor, predicted large banks would be similar in size relative to the whole system that they are today.
"Domestically and internationally, there is a huge focus on increased capital," he said. Financial institutions "will look for growth in areas that are not capital-intensive. … In the U.S. though, we still have the rule in place that a single bank cannot get larger than 10% of the entire market. My strong belief is that that will stay in place. So I think the largest domestic bank will not exceed 10% of the total U.S. banking market 25 years from now."
Geisst said, "I think the largest American bank probably would be no larger in terms of assets than Citi was … just before the crisis began."
The panelists predicted rapid consolidation, especially among small banks with aging family ownership or lacking economies of scale.
"Until the mid-'80s, there were many, many barriers, legal barriers to consolidation," Olson said. "Every single one of those barriers is now gone. The last barrier went with Dodd-Frank."
The number of branches will shrink, but the personal contact provided by them will still be vital, the panelists said.
"We believe that in total over the next few years, you're going to see 5,000 branches taken out of the system," Whitney said. "There is just not as much profitability in bank branching as there was."
Savvy regional banks could be the big winners as the industry evolves.
"You will see more strengthening in that area, particularly of the superregionals, which will basically be driven … by management," Rhodes said. "The largest banks now don't have a mandate forever to be there."
Whitney agreed. "There are other superregionals that are incredibly savvy, stealth players that are maintaining asset levels by small, inexpensive acquisitions and they will grow," she said.
Despite globalization and contraction of the industry, community banks will not die, Rutledge said.
"There may not be 4,000, 5,000, 6,000 of them, but there will still be a number of banks that crop up in a particular local community or one that thinks it has a particular niche, maybe an ethnic niche," he said. "It might be some kind of a product niche. … But I do think there is something that will continue to be of value in terms of the personal relationship that is more likely to exist at a particular community bank than at a branch of a distant bank."
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