It's a bittersweet time to be a banker

This was a good year to be a banker. Interest rate spreads widened, fattening pocketbooks; Congress passed legislation that partially deregulated the industry; and many states lifted usury limits, giving bankers some relief.

It also was a tough year to be a banker.

Inflation made those higher earnings somewhat illusory; more nonfinancial institutions are offering banking-related services without the same regulations; and the recession has both lowered loan demand and made marginal customers even more marginal.

This bittersweet time to be a banker, says Lee Gunderson, president-elect of the American Bankers Association, means bankers "will have to sharpen their pencisl and improve their performance."

Confronting the bankers in the 1980s, notes Mr. Gunderson, is the challenge of coping with the Depository Institutions Deregulation and Monetary Control Act of 1980, the legislation passed by Congress which is supposed to loosen government controls and increase competition.

The legislation will:

* over a six-year period eliminate the ceilings on interest rates paid to small savers. Forbes magazine columnist Ben Weberman noted that this is good for savers who have been stuck with 5 1/2 percent interest over the years and bad for the money market mutual funds, which have been successfully wooing the thrifty.

* Allow the Federal Reserve Board to attempt to get better control over the money supply. Banks that are not members of the Fed will have a major portion of their assets fall under Fed reserve requirements within the next eight years. The move will put about $700 billion of deposits under the Fed's reserve-requirement rules. At the same time, nonmembers can use the Fed's discount window.

* Permit the Fed to begin charging for its services, such as check clearing. This should pave the way for more automation -- and possibly a checkless society -- to reduce costs.

* Savings accounts with check-writing features -- NOW accounts -- will ber permitted nationally. As Mr. Weberman concludes, this will "break down the boundaries between thrift institutions and banks."

Says Mr. Gunderson: "Iths easy to look at the wrong side of the legislation and think about the negative aspects of it." But, the continues, "overall, the legislation presents a lot of opportunities."

Naturally there is some dissension about the opportunities. For example, William B. O'Connell, executive vice- president of the United States League of Savings Associations, says the Federal Reserve Board "blundered" when it tried to establish both a new monetary policy and deregulate savings interest rates at the same time. "Either one would have been difficult enough to absorb by itself , but tied together, they have added up to a prescription for chronic nearchaos in the financial markets."

Mr. O'Connell charges that the Fed knew that the change in monetary policy -- allowing interest rates to find their own levels while managing money supply -- would add volatility to the financial system. Since then, he says, the average weekly swing in short-term rates has been 52 basis points per week, 3 1/2 times the average for the decade and double that of any year. Thus, he concludes, "Given this kind o volatility, the phase-out of savings-rate ceilings should have been slowed down rather than speeded up."

As one would expect, Mr. O'connell is upset because, as he puts it, the Fed's new policy "has proved to be extremely favorable to the commercial banking business and to the growth of money market funds, which appeal to people who want maximum flexibility in responding to interest-rate movements." Thus, in recent months money market funds and commercial banks have increased their share of the retail savings market at the expense of the savings-and-loan associations.

James Wooden, a banking analyst and vice-president at Merrill Lynch Pierce Fenner & Smith Inc., agrees that the new legislation will favor large commercial banks and possibily other financial institutions particularly those with the most efficient operations, product pricing systems, and the broadest sources of assets and liabilities, including access to the international markets. He councludes, "The future outlook for profitability for the smaller limited purpose banks and thrift institutions has been rendered relatively unattractive by this legislation."

All banks however are faced with deleterious problem of inflation since most banks borrow funds over the short term and lend them over the long term. During periods of high inflation, for example, banks find their borrowing costs increasing faster than the rates at which they are lending the funds. Thus, when short-term interest rates soar -- as they did in 1979 -- profitability is squeezed. At the same time, banks -- like any other business -- are finding inflation pushing up their operating costs.

To solve this problem, banks are turning to "indexing," that is using floating-rate loans. In New York State, for example, the Dime Savings Bank, has begun such an effort, which is likely to spread.

Commercial banks have also focussed on lopping expenses to increase their rates of return. In some instances this has meant cutting back on advertising and marketing and for others on planned expansions. This has been necessitated by the long-term trend of a deteriorating capital ratios and declines in rates of return on assets. Only this year when shortterm interest rates declined faster than loan rates did the banks experience any relief. But, even this year , there were problems as the recession made some customers less credit worthy. And, if Congress had not bailed out Chrysler Corporation, which owed $10 billion in short- and long-term debt, there may have been some bank failures.

Another uncertainty facing the bankers is the question of when or whether Congress will authorize multistate banking. Should this happen, says Mr. Wooden , the most successful banks will be those with the highest returns on assets, highest market value of its stock and least amount of financial leverage. In short, those banks with the best balance sheets. But, for now, the question of interstate banking is moot.

For most banks, the key to profitability in the 1970s was involvement in the international side of banking. However, today many problems have cropped up.

The biggest problem, says Joseph Feghali, senior vice- president Security Pacific Bank, "is competition." There is too much liquidity, he notes, with too many bankers trying to make loans on a less-than-profitable basis. This squeezing of the "spread" has resulted in many banks stepping away from the international markets.

Bankers have also kept a wary eye on their lending to the less developed countries (LDCs), who have been bombarded by skyrocketing oil bills. Over the next two years, forecasts Harry Taylor, the vice-chairman of Manufacturers Hanover Trust Company, the international baking sphere may well be dominated by the problem of recycling some $70 billion to $80 billion in debt to the LDCs.

However, Mr. Taylor believes, "we are making a bigger mountain than we need to out of this. This is not to say there are not problems, but aggregating that figure and stretching it over the mold, it's a disservice to the agencies, and the banking system to think we can't solve these problems."