ANDREA F. NUCIFORO JR.
Economy to ‘respond’
Despite the successive unfolding of situations that, by themselves, have caused furrowed brows – the Sept. 11 tragedies, corporate scandals and the faltering economy – state officials and industry analysts say local bankers have no cause to fear the worst as the specter of war looms closer on the horizon.
Almost one year ago, the American economy spiraled into a recession and now with the threat of war with Iraq becoming a stark reality, banks are faced with the uncertainty of what might happen to the already depressed economy.
While similarities to the market during the Gulf War are rising to the surface, bank officials say financial institutions likely have little to fear should hostilities break out.
“The issue of the Iraq situation is really of one of continuing uncertainty,” said Thomas J. Curry, commissioner of the Massachusetts Division of Banks. “However, on the bright side, that may [create] a positive effect for consumers because there is some type of positive outlook. While the reasons [for the Gulf War] are similar to what’s going on now, the degree is less serious today.”
To separate the impact of the Gulf War from the declining economy in the late 1980s is complex, according to Curry, because of the staggering state of the economy and the continuous bank failures that occurred in the late 1980s.
“The war itself was more of an additional factor in a difficult time,” said Curry. “The [Gulf] war was relatively fast and its success signaled an ultimately positive impact on the banking industry.”
Curry said he believes the Gulf War may have served as a catalyst for proving the state of the economy, and while the climate seems to be similar today, the economy in 1991 was “many times worse than it is today, and the impact of any potential war may be different because of that.”
Industry analysts and Massachusetts congressional members believe that the threat of war will not have the same effect on the banking economy as it did a decade ago, but banks will see some distress in specific industries in which they invest.
“I suspect that if we do end up at war with Iraq, the Massachusetts economy will respond in similar ways we have responded in the past,” said Sen. Andrea F. Nuciforo Jr., D-Pittsfield, chairman of the Massachusetts Joint Committee on Banks and Banking. “The banking economy relies on other sectors of the economy. If those products or services end up being in high demand because of war, that could adversely affect the financial industry.”
Nuciforo cited as an example banks that have invested in defense contractors and said, “If those companies begin to see more orders and greater demand for [defense] products, I suspect a more favorable impact.”
But as banks begin to weather the anticipation of a declining economy, analysts see a different outcome.
“The banking system is an essential [source of funds] to enterprises that support war efforts, and banks play an important mediator role,” said Eugene A. Ludwig, chairman and CEO of Promontory Capital Group and past director of the Office of the Comptroller of Currency. “Banks have traditionally been very good corporate citizens in supporting national efforts. Unfortunately, it is the element of the unknown that affects banks.”
According to Ludwig, banks are in better shape to deal with a slumping economy if we enter into war than they were in 1991.
“Banks have a more diversified portfolio and are not coming off of a period of gut-wrenching interest rates and [savings and loans] failures,” said Ludwig. “Most banks are better risk-managed than they used to be. Nevertheless, banks live in an economy, but they are better managed today to weather a bad economy.”
Bankers are so integrally tied to the economy, according to Ludwig, that if the war creates an increase in economic activity, banks will increase from that financially, but must prepare for risk management.
“For banks to weather this well, they have to be on the conservative side of risk management,” said Ludwig. “Banks might well be just a shade more open to new risks, but with war hanging around our heads, I think banks are better off to be more conservative.”
However, if a prolonged or difficult war sparks a negative economic outcome, Ludwig said banks will be faced with a delay in paying off loans and finances far different from the way they had originally anticipated.
Feeling of Safety
In the recent wake of corporate scandals, consumers need to feel a sense of security with their money, said Eugene Foley, president and CEO of Harvard University Employee Credit Union in Cambridge, and credit unions historically see a drastic change in numbers and growth when the economy is threatened.
“What we are seeing now in terms of the fiscal results is a lot like what we saw in 1992, and that does play havoc with your balance sheet risk” said Foley. “In times when the economy is bad, deposit growth in credit unions shoots up … people want to feel they are dealing with a high level of trust.”
Foley said the feeling of safety and familiarity is driving people to withdraw their money from the stock market, and said he thinks a deep plunge in the stock market is more of a threat on the banking and credit union economy than going to war.
But despite a downward spiraling stock market, Ludwig said the true indicator on how banks will cope if the United States goes to war has been how well the banking industry has held up in the current economy. Banks, he said, have done “remarkably better” than they did in the late 1980s.
“In our day and age, everywhere has its own idiosyncrasies,” said Ludwig. “But, there has been a flight to quality into U.S. banks. Overall, banks have not faired badly because this country is a source of strength.”
As far as the Massachusetts banking economy is concerned, industry officials say they are not overly concerned.
“People are not living with a ‘bunker mentality’ and aren’t coming in to take out loans to build bunkers in their backyards,” said Foley. “However, we do have significant numbers [of people] servicing through ‘The Soldiers and Sailors Relief Act,’ and that is a fairly easy thing to accommodate as a credit union.”
While the local economy is very sensitive to stock prices and war could have a depressing effect on stock values, the core business of most Massachusetts community banks is their reliance on core banking products – home mortgaging, home equities, savings accounts and commercial lending – and, according to Nuciforo, people in small family-owned businesses who have active relationships with their banks will continue to place their trust in those banks.
Nuciforo and Curry agree that more signs of resolution would be helpful and result in people – and businesses – being more confident, a state that almost inevitably boots the economy.
“Consumers look at the market and it’s stagnant, and that has to do with the uncertainty of not knowing what the immediate future will be,” said Curry. “As for the banking economy, the risks are different and we have an economic engine in the form of consumer spending … today’s economy as it affects the banking economy is much better off.”
