Financial Management of Banks and Bank Holding Companies

Abstract

DI uring last 15 years, commercial banking, long sleeping giant of financial world, has discarded its conservatism. Banks now compete aggressively to purchase deposit and nondeposit funds. They have expanded into new lines of business at prodigious rate; extended activities beyond former geographic markets in this country and even, in some instances, to foreign countries; and have adopted in ever increasing numbers earnings performance and asset goals. Martin Mayer [28, p. 49] refers to these developments as revolution that .. occurred without publicity in apparently solid structure of what was considered our most thoroughly conservative institution. During 1974, public attention focused on when Franklin National Bank, once twentieth largest bank in United States, collapsed. The more pessimistic prognosticators pointed to Franklin's failure as proof that revolution had seriously weakened ability of nation's financial system to withstand severe shocks. Throughout 1974, number of factors energy crisis and quadrupling of world oil prices, failure of Bankhaus I.D. Herstatt and other foreign banks, double-digit inflation, prime loan rate of 12% and federal funds rate exceeding 14%, staggering loan demand in face of diminishing supply of funds, collapse of certain parts of commercial paper market and call for banks to finance weak borrowers, and soaring loan losses affected drastically. Still, liquidity squeeze of 1974 and recession of 1974 and 1975 resulted in very few bank failures. Some see this as proof of bank resiliency in face of stress; others feel that many banks might have failed if they had been exposed to more stress. Indeed, some believe poorly managed institutions may not survive next boom-and-bust cycle. It is reported that Tilford Gaines, senior vice president and economist at Manufacturers Hanover Trust Company, believes there is better than even chance that double-digit inflation will recur in next two years leading to recession late in 1977 characterized by a massive wave of business and failures . [16]. Ample evidence shows that events in 1974 seared many bank managers. Catch phrases such as the great retreat, the new conservatism and quality are replacing go-go banking and growth in bankers' lexicon. There is growing sense of importance of fundamental financial management principles and an appreciation of fact that success and survival depend on understand-