The Struggling American Economy

I spent most of last week at a banking conference in Chicago. It was one of the better industry events I’ve attended in the past couple of years. The panel of speakers included representation from every sector of the financial services market, from a key analyst at Goldman Sachs to a former President’s chief economic advisor.

From the perspective of a casual observer, what’s going on in our economy is really interesting - we’re seeing unprecedented lending standards result in unprecedented charge-offs. No one knows how bad it’s going to get, but everyone I visited with over the course event agreed that the economy is going to get worse before it gets better.

So, how is this going to impact the average bank customer? Here are my best guesses on how the next couple of years are going to shape up for bank customers.

1. Mortgage underwriting standards are going to get more stringent

This isn’t a surprise. Expect it to become much more difficult to get into a home. Individuals with low debt-to-income ratios and credit scores over 740 will still have access to credit of all kinds, including mortgages, but those with less-than-perfect credit, no down payment, and high consumer debt are going to have a hard time getting into a traditional 30-year fixed mortgage at the best rates.

New trend: banks will begin to market savings accounts targeted to those that have been asked by their lenders to make a 10% down payment on The American Dream

2. Banks will continue to come up with creative savings account service bundles

Banks of all sizes are experiencing record losses and write-downs, and liquidity problems are running rampant. Banks need low-cost deposits more than ever.

Look for more checking/savings bundles like Bank of America’s “Keep the Change” and Wachovia’s “Way to Save.” Small banks are getting into the innovative savings game as well - check out this article at netbanker about a new product called “Smarty Pig” - it’s a savings account with a social networking element currently in beta at West Bank.

Also expect to see ‘creative positioning’ of existing bank products. Banks will create an offshoot of a traditional money market account or high-yield savings and call it a “risk-free CD” - a savings product that has a guaranteed rate of return but can be withdrawn at any time, without penalty.

3. Student loans will be the next victim of the sub-prime fallout

50 of the 2700 current student lenders have announced plans to discontinue their student lending programs. Expect rates on non-federal student loans to climb into the double digits.

4. Long-term CD rates will rise

The only piece of really good news I have is that the yield curve is positively sloping for the first time in a few years. Expect to see more CD specials locking in decent rates for 2-5 year money.

5. Household pricing will be next big thing in deposits

Banks are doing a lot more household (also called “relationship”) pricing. We’re going to see banks wave “buh-bye” to unprofitable accounts by dropping rates on expensive single-relationship account holders and high-touch customers with small balances.

Only a handful of the largest US Banks have the technology and analytics in place to do this today, but eventually most banks will set account interest rates and run specials on a customer-by-customer basis - much the same way airlines price airfare.

Parting Thoughts

The experts that addressed my group couldn’t tell us how long this “economic downturn” will last - we heard everything from 18 months to five years - but they did agree that deposits are going to see a lot of action as banks try to improve their cash positions. If the Fed would just be a bit more concerned about inflation and stop lowering target interest rates - it would be a great time to be a saver!