Cash The Checks

Back in the 80’s, banks were struggling. The practice in those days was to cover the costs in banking with the interest rate margin that they charged for their loans. The better approach would be to create a plethora of transaction fees, which would allow the interest margin to come down and be competitive.

All banks were quick to adopt the new strategy.  It spread through every department of the bank from credit cards to forex.  In order to encourage compliance, bonuses were tied to transaction fees collected, a critical mistake.  Incentives work, but you had better be sure where and how you place them.

Banks soon began to covet the enormous fees collected by their investment banking brethren. However, the Glass-Steagall Act, passed during the Great Depression, stood in their way. The Act prevented banks from multi-state branching and separated them from investment banks, known as merchant banks at the time. Merchant banks helped companies raise capital, but took no deposits. Traditional banks took deposits and made loans. Banks found ways around the multi-state prohibition, and finally in 2002, the Bush Congress removed the teeth in the Act altogether. Is there a way out of this predicament?

Many believe Glass-Steagall should be re-instated. Others point to bonuses and compensation. These trends built up over decades and will take time to fix, but banks were intended to take risks and make loans, not live on just fee income. Banks need to be Banks again.