Laws unlikely to cure bad banks’ greed

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Since the financial world nearly melted down in 2008, Americans have debated what should be done to prevent a similar crisis in the future. People who previously had little or no interest in banking issues now are familiar with concepts such as “too big to fail” and debates about whether to “unwind” banking behemoths.

However, Larry White, John H. Poteat chair of banking at East Tennessee State University, believes placing too much faith in new bank regulations may be misguided and is skeptical new laws will curb bad behavior. Instead, he argues that individual banks must create a corporate culture that recognizes and corrects unethical activities.

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

No, I do not think branches are on their way out. However, I do believe that with the rise of online and mobile banking, we will see a continuing trend toward fewer branches. Brick-and-mortar branches are very expensive and are only available for full service for approximately one-third of the typical day and even less on weekends.

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There is still a considerable portion of the population, predominantly older individuals, who want to use a branch to conduct their banking business. However, these individuals are, by and large, infrequent users. The desire for convenience, along with technological advances and cost management, has changed the way most individuals conduct their banking business. Bill paying, funds transfers, loan requests — among other activities that were historically conducted at a branch — are now conducted by phone, computer and tablet.

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?

Banks are offering fewer free checking and other services in part because their revenues are lower as a result of lower interest rates and lower loan demand, and in part due to increased costs of doing business. Lower interest rates and lower loan demand is a function of the lackluster economy, as well as some recent regulatory changes. Increased costs are a function of increased regulatory changes.

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’?

This is the subject of much debate today. Some argue that Basel III and Dodd-Frank will end “too big to fail,” while others would argue that these new regulatory changes will have no effect on “too big to fail.” Personally, I would lean more toward the latter position.

Banking organizations are in the business of risk management — taking prudent risks and pricing for these risks. Even prudent risks can produce unintended consequences and unforeseen results. If we try to restrict banking activities too much to minimize the risk, this will restrict economic growth, which will likely lead to more loan defaults, business failures and possibly bank failures.

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

Certainly some of our banks are at risk from the turmoil in Europe because of their international activities overseas, and there could be some trickle-down effects to other banks. However, I do not feel that the risk is great. If the European banking authorities continue to make changes to strengthen their banks, that will certainly benefit U.S. banks that have exposure in Europe. Of course, an improved world economy would help everyone, every business, including banks.

What has the ‘London Whale’ incident taught us about the limits of banking?

All my life, I have heard laws are written for those who will obey them. I believe that statement could be expanded to include regulations, banking and otherwise. I am not sure we can ever regulate ethical behavior and greed. Vigilant management at all levels in an organization would, in my opinion, be more effective in the timely recognition and correction of unethical or illegal activities. This vigilance has to be ingrained in the culture of the organization so every member of the organization “buys in” and practices vigilance on a daily basis and takes appropriate steps when undesirable activities are observed.

We would like to thank Larry R. White, John H. Poteat chair of banking at East Tennessee State University in Johnson City, Tenn., for his insights. Questions for this interview were contributed by Claes Bell, senior banking analyst and writer for