Commercial Banks and Thrifts: Facing Tough Times Due to Housing and Credit Crisis
COMMERCIAL BANKS, THRIFTS AND MORTGAGE FINANCE INDUSTRY ABSTRACT
July 2008
Commercial banks, and thrifts and mortgage financing institutions are experiencing their worse crisis in recent history, and perhaps its worst since the Great Depression. They are an essential part of the U.S. financial sector and have evolved over years. By accepting capital deposits from individuals and institutions and providing them to borrowers as loans, they act as intermediaries; thus, satisfying the financial needs of individuals and institutions. The industry is presently under huge pressure because of the decline of the housing market, which started in 2006 and is expected to continue through at least the balance of 2008.
Amid the economic downturn, M&A among banks has also declined as compared with historic figures. In the current environment, institutions have shifted focus towards sustainability rather than inorganic growth. Credit quality of loans has declined since 2007 because of the financial crisis and is expected to worsen further in the current year. Owing to the increase in loan loss provisions, non-current loans and foreclosures, some small institutions have either failed or are on the verge of bankruptcy. The number of problem institutions identified by the FDIC has also increased for the current year due to the aftermath of the housing bubble. The current scenario has forced banks to employ various cost-cutting strategies, which include reduction in workforce through layoffs. Almost all large banks have announced their plans to reduce workforces over two to three years.
The Federal Reserve and the Government of the U.S. have taken measures to resolve the current crisis. The Federal Reserve has directed the affected lenders to reach an agreement with the borrowers to minimize losses. In addition, the Treasury Department has introduced a new proposal, which empowers the Federal Reserve to oversee the stability of financial markets. The proposal includes merging the OTS with the OCC. Under another important restructuring clause, other financial supervisory bodies will be replaced by only three big agencies, which will supervise the entire financial market. Given the possibility that the largest mortgage institutions in the U.S., Fannie Mae and Freddie Mac, might collapse, the Bush Administration has proposed a bailout plan that would employ both loans and investments by the Treasury Department. However, corrective measures taken by the Federal Reserve and government agencies will only reflect in medium-to-long term, as in the current year the industry is expected to continue to operate under immense pressure.
Technology has broadened the scope of services provided by the industry, and as a result expenditures on IT to integrate and manage processes efficiently have increased in recent times. Regulatory compliances, such as introduction of Basel II will result in a further increase in allocated budget toward implementing risk management technologies. However, because of the recent credit crunch, banks and savings institutions are forced to spend cautiously on IT-related requirements.
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