Thursday, February 18, 2010

A Bigger Hurdle for Banking: Mutual Distrust

The credit crunch may leave the banking industry with a bigger challenge than the current imperative of staying solvent. A mutual distrust is building up between banks and its three biggest categories of borrowers: homeowners, real estate developers, and consumers. The animosity between commercial real estate developers and banks has come out in an unprecedented wave of lawsuits in both directions. Unfortunately, in dozens of instances already, it has been both the developer and the bank that end up in bankruptcy.

The statistics show consumers and banks distancing themselves from each other to a degree that was hard to imagine just a year ago. Total U.S. consumer credit has fallen for probably 14 straight months, after basically never declining before. You can also see a shift at the grass roots level, where the Move Your Money campaign has caught on in a big way, defying the skeptics.

It has long been assumed that everyone needs to buy a house, but the scale of home mortgages could change drastically with a change in home buyer attitudes. A person who postpones buying a home for 7 years may be able to cut the size of the mortgage in half. They would end up paying only one fifth as much in interest to the banks. The book The 4-Hour Workweek became a bestseller in part by telling people innovative ways to avoid the burden of home ownership. Banks, for their part, have made it harder than ever for home buyers to apply for mortgages.

The same pattern is playing out in smaller categories too: small business lending continues to fall month by month, student loans are no longer seen as “smart,” auto loans are part of the reason auto sales are down.

While banks’ view of borrowers could change as soon as the next spreadsheet, borrowers’ new view of banks is further solidified with each week’s headlines and probably can’t be changed without some proof that banks have changed. But not many banks seem interested in making the changes that customers are looking for. Maybe this situation could be resolved by making customers lower their expectations. Or, maybe it will give rise to a new kind of bank.