Banking is not meant to be exciting. Interest rates, financial statements, title work, and, ugh, regulations won't raise your pulse. When my dad started working for Indiana National Bank in the early 1970's, as he tells it, it was painfully boring. In those days, banks were so highly regulated that bankers were administrators of established practices, not financial innovators. Banks weren't allowed to branch outside of their counties, offer creative products, or, frankly, compete with one another. Credit scores didn't dictate interest rates and securitized subprime mortgages were but a gleam in Wall Street's eye.
Banks -- in those days, much more similar to one another in size -- were stable employers, offering moderate pay, rich insurance benefits, and a conservative corporate culture emphasizing loyalty. The bank I grew up with almost never had a lay-off, but it also awarded only modest bonuses, if at all. This was a small bank in the heart of the steel industry, where a fair number of the bank's employees sought stable pay and health and retire benefits in order to supplement or safety net their spouse's increasingly unsteady work. It was good work, if not terribly exciting.
Even the large banks were once conservative. In the latest journalistic stab at Wall Street, the New York Magazine article, "The Wail of the 1%," reveals, among other things, the transformation of the corporate banking industry. What once was seen as a well-paid, respectable career choice for well-educated individuals -- on par with practicing medicine or law -- Wall Street banking devolved into a "casino culture operating in the financial-services industry." This new high-risk, cortisol-infused industry was spurred by the lure of massive profits, made possible by deregulation of the 1990's.
Meanwhile, many community banks remained, well, boring. Walk into a community bank and ask some employee, anyone at all, why he got into banking. You can bet he won't mention anything about retiring at 40. And if you ask why he stays -- you can expect some kind of response about the security, decent benefits, and good people. Community banking is a straightforward business populated by risk-averse people.
This is not to say that small banks always toe the line. Small bank loan officers, many of whom worked at least partially on commission, made loans straining borrower credibility, and the booming real estate market swept up their tracks. But community bankers -- sensitive to software and compliance costs, but also loyal to old habits -- are typically slow to jump on board with new, often risky, trends. My dad recalls without fondness when home equity loans and second mortgages became more popular. More and more banks had begun to offer these products, and customers began to insist upon them, eager to use home equity to purchase cars, pay their kids' tuition, and deduct the interest from their taxes.
But extending the life of a loan tempts life's uncertainties -- recession, illness, and job loss -- and the practice can be a bad bet for both parties. Particularly bad for the borrower: if you've never looked at an amortization schedule, the bank takes in interest more than 50% of your monthly payment for the first half of the loan term, making it very difficult to earn equity in even a stable real estate market. And each time you increase your debt, that equity is further from reach.
As Paul Krugman pointed out last April, we've been here before. Banking's original heyday preceded the Great Depression, fueling massive personal debt and huge profits for the financial sector (yes, our great-grandparents liked their version of the cash-out refi, too). The federal government then took away the bankers' toys and made banking boring--for the first time. This period of increased regulation didn't see the downfall of the American economy; rather, it saw an economy growing steadily with far less dependence upon Wall Street.
The stock market is up these days, even if employment isn't, and it's easy to forget that, just two years ago, the world was gripped by the fear of America's total economic collapse. Now that was exciting. You don't have to depend upon -- or even want -- Congress to take the fun out of banking again. You can promote a sane, stable, and yet still profitable economy, by moving your money to a local bank. Let the big banks spin the casino wheel with someone else's chips.