Banking

The financial crisis and the response by policymakers have changed the environment in which retail banks operate, said Federal Reserve Gov. Elizabeth Duke in a June speech to the Consumer Bankers Association. As a result, banks will have to make considerable changes to their business practices and products, she added.

The Federal Reserve took a number of actions to unfreeze credit markets and ultimately support consumers and the economy, said Duke, including the creation of the Term Asset-Backed Securities Loan Facility (TALF). The TALF, which expired at the end of March, provided funds for purchases of securities backed by nearly three million auto loans, more than one million student loans, and about 850,000 small business loans, she added. Actions to support credit markets were accompanied by new consumer protections in areas such as subprime lending, credit cards, and student loans. Additional protections for consumers, while long overdue, will have a considerable effect on banks' business models, Duke said.

Consumers struggle with debt payments, declining wealth
Just as banking conditions have changed, so has the situation facing consumers. Many households saw their household net worth decline and remain burdened by debt payments, Duke said. The household debt-to-service ratio, which declined from its peak near 14 percent in 2007 to 12.5 percent recently, is still above its average of the past 30 years. Further, a recent survey reveals that households are concerned about their ability to service their debt, she added. A more cautious attitude toward debt, combined with new consumer protections, should result in "more sustainable credit decisions by lenders and borrowers alike," she said.

Crisis highlights need for balance
"The lessons of the recent crisis underscore the need for a stronger, safer, but still robust system of consumer credit," said Duke. She listed five guiding principles that are key to balancing access to credit and sound risk management: adequate consumer protection, prudent underwriting, transparency, simplicity, and properly aligned incentives.

The new consumer banking model that emerges from the crisis will be shaped by past experiences, said Duke. Adjusting to these changes will require all stakeholders to work toward reestablishing "a financial services sector that is safe, transparent, efficient, and that effectively serves the needs of the real economy," she said.

June 28 , 2010