Why to expect banking changes
The "why" of expected changes in the banking industry in 2009 is both simple and complex at the same time. The global economic downturn (e.g., recession) gripping most of the world is the simple, primary cause of dramatic changes in the banking industry.
The combination of changes to internal operations, financing, and depositor/borrower relations, however, is much more complex.
In the U.S., the two primary founding blocks of a strong economy have historically been manufacturing and real estate. In the past two decades, the move of massive amounts of manufacturing activities from the U.S. to foreign countries has severely damaged one of the two foundations of the U.S. economy, leaving the real estate market as the lone rock of stability.
The virtual collapse of this market in the past few years has affected not only the U.S., but the global economy, toppling it as though it were a mere house of cards (pun intended).
The U.S. mortgage industry, led by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) since the early 1970s, depends on the "pooling" (putting together) and packaging of home mortgages into securities and bonds.
These products are sold into the global investment market to generate the funds for lenders to make more mortgages, continuing the availability of loan dollars for home buyers and owners.
The mismanagement (some would say, greed) of many mortgage lenders and brokers over the past decade have led much of the world investment market to value these securities and bonds at zero, in many cases.
Without buyers for these investments, there is no cash to return to mortgage lenders for new loans. Also, the high number of mortgage loan delinquencies and foreclosures places more homes on the market than buyers can purchase.
Economics 101 – supply and demand theory – takes hold in a negative way, forcing home prices – and fair market values (FMVs) – down . This cycle has become a disastrous "Catch-22" of lost money, houses, and dreams.
The banking industry, with a big helping hand from the U.S. government, is implementing changes that will affect you in ways that have not been seen since the Great Depression of 1929. Here are some of the more widespread changes to expect in the remainder of 2009 and, possibly, beyond.
Possible deposit and savings account changes to look for
Increased deposit insurance from the FDIC (banks) and the NCUA (credit unions).
In an attempt to restore and increase your confidence in U.S. banking institutions, deposit account insurance is increasing from the usual $100,000 per account up to $250,000 per account on a temporary basis. Your typical savings account will enjoy this larger level of protection, whether you realistically need it or not.
More attractive interest rates
Savings accounts, money market accounts, and certificates of deposit all may come with higher interest rates. Deposit account rates are typically influenced by the Federal Reserve and competition. For obvious reasons, banks have no incentive to increase savings interest rates to levels significantly higher than their local, regional, or national competition.
If loan rates are fairly constant, banks would only reduce their net profit. Not a wise policy. They may, however, make a valiant attempt to display their strength and customer concern by offering savings account rates a bit higher than the market may dictate during this difficult period.
More creative and flexible deposit account selections.
While it's true that many banking institutions do not need additional deposit funds (see projected loan changes below), you may see better terms on some accounts (e.g., free checking accounts that pay interest and offer free checks) to enhance customer relations and inspire confidence.
Potential loan changes to look for
Tighter credit and higher credit scores needed to borrow.
Because of the losses in their mortgage portfolios and the job losses stemming from the global recession, banks are forced to "tighten" credit (raising standards typically met by only the best borrowers) and reduce the size of many loans. This is why banks seldom need more savings account and money market account dollars as loan demand shrinks.
Increased loan fees and charges.
With fewer new loans and smaller balances, banks need to maximize other revenue features of making loans. Increased fees and related charges (often called "junk fees") will typically follow new loan volume reduction.
Home mortgages available only to high credit score borrowers.
Since the market to sell or "securitize" (offer securities or bonds) disappears, so do mortgage loans to less than high credit score borrowers.
Uncertainty remains
These are but some of the banking changes to expect in the remainder of 2009. The potential better terms on your certificate of deposit may be quickly offset by your curtailed ability to borrow when you need to. The U.S. government, banks and credit unions, and all consumers hope this condition is short-lived. The future will dictate the duration of this situation.
See also: Banking FAQs
