Thursday, January 20, 2011

Continuing problems seen stalling Texas banking

AUSTIN -- Continuing problems in the Texas banking industry probably will keep the state's financial institutions out of the lucrative and expanding global banking arena, a UT-Austin study concludes.
Dr. Carol T. F. Bennett says the "lackluster Texas economy and problems in the banking industry itself have led to the industry's disintegration."
And, she adds, "Whether Texas will ever reclaim a significant independence for its financial institutions is highly uncertain."
Bennett, who earned a Ph.D. in economics from UT-Austin and currently works for Price Waterhouse, says Texas financial institutions have been more vulnerable than those of other states for several reasons:
* Depressed oil markets since 1986.
* Bad real estate loans in 1983-85.
* Texas' ban, until 1987, on branch banking, which Bennett says increased the number of banks and the cost of regulation.
"Ironically," she says, "the law that was designed to keep banking in local communities had the effect of driving it out of state."
* Savings and loan deregulation, which allowed thrifts to branch more easily and to grow faster than banks.
* Disparity between the ease of entry into the industry and difficulty in finding "a graceful way to exit."
* Fraud, which Bennett calls the "flip side of Texas optimism."
"The statistics are indisputable," she writes.
"Of the nearly 1,000 banks that have failed since 1982, 333 are in Texas.
"Of the $21.6 billion of Federal Deposit Insurance Corporation cash assistance required from 1984 through 1988, more than $9 billion has been spent on Texas banks."
In addition, Bennett says, seven of the 10-largest Texas financial institutions in 1980 have since been sold to out-of-state investors, and two of the remaining three have been assisted by the FDIC.
Because of the difficulty in solving the crisis, as well as continuing problems, Bennett believes Texas "is likely to miss the anticipated trend in world banking."
Not only is Texas in an uncompetitive position, she says, but "several complex regulatory and judicial issues" remain to be solved, including how the FDIC will compensate bondholders of insolvent holding companies, whether new capital requirements for savings and loan associations will allow them to compete in the future, and whether "the new perceptions of junk bonds and leveraged buyouts will favor banks as a traditional alternative to financing."
"In the context of worldwide banking, where nine of the 10 largest banks are Japanese, what should have happened in the United States was a consolidation of financial services, not a splintering of them," Bennett says.
Such a consolidation eventually will occur in the U.S. because of the economy of scale, she believes.
"It is unfortunate that Texas-owned banks, at least for the immediate future, have missed the opportunity to compete in this worldwide arena," Bennett says.

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