The Great Bank Debate Continues

This is the response to Financial Bloggers: The Bank Debate Is On ; Another Response to Customers Revenge, the very interesting discussion about customers and bankers we're having back and forth.

First, I'm going to respond to a few specific quotes:

In fact, banks are making huge effort behind the scene to provide us with the most stable economy...The risk management and compliancy department are a huge sources of expenses for banks. However, they have no other choice but to provide us with this invisible service in order to guarantee that our money exist when we need it.

This is a self-contradiction. In your last post you said that I mistakenly believe banks have high obligations and that I should reduce my expectations, comparing them to grocers. If you said that before then I can't believe that a week later you believe banks exist to stabilize the economy. They are still here only to make money, just like the grocers. Anything "extra" they do, including managing risk, is only done because regulators force it. For example, here is a 2002 news story about how TD banks managed risk.

Banks don't care about the economy except insomuch as they care about their own survival. A beautiful example is the recent lending disaster in the US where banks made very risky loans to thousands of people. These were loans based on real estate speculation to people who were not qualified nor stable enough to take them on. When the housing markets softened and prices did not rise sufficiently by renewal time then individuals were all of a sudden caught with loans they couldn't afford for assets they couldn't sell to cover the loans.

Another example is the habit of selling loans. Before, like in the TD story above, banks used to have to manage the riskiness of their loan portfolio or either face loss or regulator intervention. Nowadays it's common practice to package and sell loans. The profit is made immediately and there is no more loan on the books to ruin any ratios or prevent making further loans. The risk has been injected directly into the economy, where buyers may not have "huge risk management departments" to help them understand what they are exposed to.

To me it's clear that banks don't shy away from making a buck in any way possible, even if it INCREASES instability or risk in the economy. It isn't an understatement to say that all of this risk offloading is new and potentially dangerous territory. Banks DO serve a major function in managing modern economies, which is why their greed is regulated. Selling loans is a way to get around those rules and governments are not really sure what to do or how dangerous it really is. However, we've seen some serious examples in the markets and for front line consumers in the US and Europe (which happen to be places where they have really big and powerful banks). Anyway, we aren't really talking about that side of it, but since you brought it up :)

While I can not motivate the decision of changing the fees and offer of products in branches (I work in a head office), I can tell you that it is not the main source of their profit. In fact, they make much more money from the market and their investment operations with other institutions which is far from us, mortals ;-).

That's a bit of a red herring. I have several friends who are investment bankers so I do have some knowledge of how banks make some of their other money. As much as I think that side is also over-priced for what is provided (Over-cynical stamement: more like I'm jealous that I can't charge millions of dollars to stick my finger in the air, low-ball a stock price, pre-sell the low IPO to my wealthy clients so they can make their 20% pop while I collect the transaction fees) I don't really have anything to complain about there because the buyer businesses have a lot more leverage than your average bank customer. If they wanted to get higher valuations or better service they could get it like Google did when they auctioned their IPO.

The point is that it doesn't matter how they make other portions of their money. We're talking about how they make money from the relatively helpless retail customers. By the way, looking at RBC's annual report we see some interesting tidbits:

• They make about 1/3 of their money via interest. We also can see that about 2/3rds of their loans are consumer loans, which include mortgages but also line's of credit and of course the cash cow 19% credit cards.
• About 3/4 of their net income is made from a business segment called "personal and business". This is retail banking, corporate banking (but not "the market and investment operations") and an insurance arm. Non-interest income (i.e., fees) was high than interest income by about 20%. Return on equity was a staggering 32%.
• They have 32B in deposits but 135B in loans. Every dollar you work for and deposit, they lend out at least 4 times, not including the loans they sold.

All this to say that somewhere, good bankers exist! I would suggest Customers Revenge to switch bankers instead of leaving his bank as we will not have much choices left.

This is true advice. Banks have different levels of competence and different types of people. Systemically speaking, I don't think they put their best and brightest out at the teller windows or the customer service counter. My best experiences came when I made it clear to the bank that I did have a lot of products with them at which time they assigned me an individual banker. I had never experienced this before but here was a person who actually did things for me. It was clear he was still working for fees but he was much more sophisticated in that he knew he had to provide value. He called me from time to time, checked on my finances and notified me of things he thought might help me. It was good while it lasted, but I think he was too competent for that job because he was shortly moved to another position.

I'm glad that the Financial Blogger commented on how employees are compensated. Perhaps compensation nowadays has changed for the better and it may be time to revisit. I would like his advice on what I should do with my assets and how I would go about leveraging them to get the best value from a potential banker. Right now I am managing things myself out of frustration with poor service and death by a thousand fees. However, being on the inside and knowing that banks have apparently become more sensitive and reasonable, he may have advice for us customers.

The bank makes money, which is good. Every healthy business needs to make money and I want my bank to be the healthiest business. I just wish they would help me to be healthy too.