banking

How banks changed, where they are going

Leonard Arvi, Ph.D.Since 2008, the world of financial services has been turned upside down. That is especially true of the banking industry, which has witnessed multiple bank failures and scandals such as the "London Whale" incident, in which a rogue trader for JPMorgan Chase cost the bank billions of dollars by making a risky bet on the credit market. In response, government authorities have passed new regulations intended to rein in these excesses.

Where does the banking industry stand today? Leonard Arvi, Ph.D., assistant professor of finance in the Franklin P. Perdue School of Business at Salisbury University in Salisbury, Md., says the industry remains "enormously complex," which presents a major hurdle to regulators. He also identifies several emerging trends likely to impact how consumers bank today and tomorrow.

With the rise of online and mobile banking, are bank branches on their way out? How has technology changed the business in recent years?

Online and mobile banking have enhanced access and ease of availability of banking services to customers. The comfort of round-the-clock banking has definitely made life much easier and productive. I do not think technology is going to displace physical bank branches in the near future. The widespread use of ATMs has not reduced bank branches. People still need human contact, so I don't think bank branches are going away. Technology is a great enabler, making banking more accessible and reducing costs for consumers.

Why are fewer banks offering free checking these days? Is it linked to the regulatory changes of the last few years, or is it something else?

The explicit restrictions on how much banks can charge for credit card fees, penalties, etc., have made banks look for newer sources of replacement revenue. Making customers pay for basic banking services is a revenue generator. That is the reason why many banks have started charging for checking accounts. Still, customers can find good deals by moving to credit unions and smaller community banks that do offer free checking and basic banking services to their members.

With the new banking reform measures known as Basel III coming through the pipeline and implementation of Dodd-Frank Act regulations on the financial industry, are we seeing the last of 'too big to fail'? Is the Federal Deposit Insurance Corp. really prepared to 'unwind' a JPMorgan or Bank of America?

I do not think the FDIC or any other banking regulator has the capacity to manage an orderly wind-down of mega financial institutions (such as) JPMorgan or Bank of America. The recent bad news of Libor fixing, banking with Iran, and unreported or lax financial controls of laundering money has definitely impacted most global banks. The case for more effective regulation, such as requiring banks to downsize to manage their risks, will be increasingly sought. Banks have become enormously complex, and regulators have not still figured a way to manage such mammoth institutions in a meaningful way.

Are American banks at risk from the financial turmoil in Europe?

American banks do have some exposure to the European sovereign debt, but it is very small compared to their overall debt. Any financial turmoil in Europe will affect the U.S. market due to contagion, but I do not think any U.S. bank in particular will face survival issues like in the 2008 crisis.

What has the 'London Whale' incident taught us about the limits of banking regulation?

The "London Whale" incident has reiterated the need for effective and robust risk controls within any financial institution. Unless the financial firms adopt stringent risk measures and clear accountability, it is hard for any regulator to prevent such incidents from recurring.

We would like to thank Leonard Arvi, Ph.D., assistant professor of finance in the Franklin P. Perdue School of Business at Salisbury University in Salisbury, Md., for his insight. Questions for this interview were contributed by Claes Bell, senior banking reporter for Bankrate.com.

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