With the effects of the Sept. 11, 2001, tragedies still lingering and large-scale scandals in the business world emerging, the banking industry in 2002 witnessed a slew of new regulations, legislative proposals and laws all designed to cope with a new reality. But despite a year filled with privacy laws, controversial elections, an unstable stock market and debates on corporate ethics, most banks – especially regional and community institutions – posted profitable numbers.

The renewed focus on corporate ethics that began in 2002, stemming from corporate scandals, arguably may have the most far-reaching effect, and members of the banking industry said they believe the issue has changed the face of finance forever.

“This is not a flash in the pan or a short story that will be on the fourth page of the paper – this is a sea change,” said Robert Mahoney, vice chairman of Citizens Financial Group. “People have decided they can be bigger than the law and innocent people were hurt and, in the end, the ethics of finance have changed forever.”

Mahoney said he believes a company today that has “any question on accounting standards cannot get proper financing due the uprising of the corporate scandals of Enron, Tyco, WorldCom and the demise of Arthur Andersen.”

“A financial services company, in particular, who has questions on accounting, conflicts of interest or regulations, would lose tremendous confidence,” said Mahoney. “Corporate ethics have a bigger impact on financial institutions because the standard of care and ethics is higher – as well it should be.”

Early in 2002, before the stories of multiple corporate scandals came to a boil, the country was reassessing its vulnerability to additional terrorist attacks, and banks were considered among the probable targets of terrorists seeking to disrupt the economy.

Attorney General John Ashcroft announced in May that financial institutions were a potential target for future terrorist attacks. But according to Daniel J. Forte, president of the Massachusetts Bankers Association, banks were already prepared to meet the challenge because many preliminary precautions had already been taken in conjunction with Year 2000 planning.

“Banks are still responding to [Sept. 11] issues,” said Forte. “When Ashcroft gave warning about financial institutions being targets of attacks, banks were prepared … and because of Y2K planning there were fallback positions. We are very fortunate and blessed.”

But even as banks scrambled to comply with new regulations designed to thwart funding for terrorists by more closely monitoring financial transactions, many factions were also calling for great consumer protections in the realm of privacy, with the banking industry sometimes caught in between.

“In terms of banking the big event in 2002 is the connection – or the lack of connection – between two competing challenges: the business of privacy and the enormous legislation and activity surrounding it, and the USA Patriot Act, which arose from Sept. 11 and put [banks] in the middle of identifying who are the good guys and who are the bad guys,” said Mahoney. “Sharing information with regulators and government agencies put [banks] right in the middle. We are not in a position to make decisions on what we can do; we are told what to do.”

The banking industry saw other significant legislative changes in 2002 with the introduction of the Sarbanes-Oxley Act, amendments to the Gramm-Leach-Bliley Act and the constant review to the Consumer Protection Information section of the USA Patriot Act. In an election year, Forte said, such activity in Congress is not unexpected.

“In an election year, you can work for legislation and against legislation – everyone is trying to get out and campaign, but it also creates some pressures to get legislation done or drag your feet,” said Forte.

One piece of legislation – bankruptcy reform – that would have greatly affected the banking industry made headlines not only because of its direct implications, but also due to controversial language that was added to the proposal. Congress failed to compromise on a bill that would make it more difficult for people to wipe out debt in bankruptcy because of a provision that would have prevented abortion protestors from declaring bankruptcy to avoid court-imposed fines.

“The bankruptcy reform legislation is an interesting phenomenon,” said Forte. “It’s a bill that overwhelmingly passed both sides of Congress and yet we can’t see the bill signed. It’s a coalition between the Democrats who didn’t like the bankruptcy bill and conservatives who didn’t want to be tainted with a hint of abortion. These are two groups on the vanguard of each of their parties coalescing in the middle and you have to wonder if this is just a new paradigm to watch for in 2003-2004.”

Bay State Banks

While the banking industry failed to push through bankruptcy reform, at the state level banks large and small posted big numbers.

The “Big Three” banks – Fleet Bank, Citizens Bank and Sovereign Bank – saw an increase in deposits as consumers deserted a shaky stock market. But even with consumers actively seeking out banking services, the fight for market share remained fierce, a situation that was intensified as Portland-based BankNorth made its way into Massachusetts. As a result, advertising and marketing campaigns became more competitive than ever in 2002.

However, it was the state’s community banks, which for the most part had avoided loan losses related to corporate crashes, that posted truly banner years. Consumers, dismayed by continued mergers and industry consolidation, remained loyal to their local banks or sought them out, and many local banks responded by posting record earnings for the year.

“At first, it was about ‘stop being a bank and become a financial services company,'” said Mahoney. “But in 2002 … the market was not rewarding those people. In 2002, everyone wants to be a bank because the market is rewarding earnings on a longer basis and not short-term, one-stop earnings, and people learned it’s just as hard to do community banking as it is to do corporate finance.”

On Oct. 7, 2002, Gov. Jane Swift signed a piece of legislation that allows banks and financial institutions the luxury of choosing their own retirement plans – a victory in its own right for credit unions, cooperative banks and thrifts that had lobbied the Legislature for decades to change the long-standing statute limiting the ability of bank associations to offer retirement services to clients outside the cooperative banking industry.

With the redraft of the 1946 legislation aimed at regulating employee retirement associations, a broader potential market for the Cooperative Banks Employees Retirement Association, Savings Banks Employees Retirement Association and the Credit Union Employees Retirement Association would emerge and change the way cooperative banks, savings banks and credit unions invest in retirement services.

Additionally, increased competition among those players and the private insurance sector, and increased choices in retirement plans for bank and credit union employees, could offer member clients more flexibility in their retirement options, a step Forte said was not only a voluntary effort among CBERA and SBERA, but one that “in the end will enhance those institutions.”

Among other initiatives on which Bay State bankers focused in 2002 was crime prevention. Bay State banks teamed with local law enforcement and the Federal Bureau of Investigation to proactively discourage robberies through the Bank Robbery Working Group, which recommended, in part, asking customers to remove hats and sunglasses when entering the branch.

The number of bank robberies in the state and the nation has risen dramatically in recent years, according to published reports, and while the final bank robbery numbers for 2002 have not been released, Forte said, “Things are moving in the right direction and [banks] are making strides [in preventing robberies].”

And as the year wraps up, banks continue to make great strides alongside a recession and an economic decline, but bankers say some of the bigger issues from 2002 will continue to have an effect on the way financial institutions operate.

“The continuation of the recession was big – the economy was only growing by 1 or 2 percent, and in New England we suffer with our own budget crisis. A three-year recession is a big deal with deposits and with jobs,” said Mahoney. “The recession will eventually end and the Patriot Act and privacy issues will be resolved. But corporate ethics will forever remain an issue in our industry.”