What Causes Profitability?

August 12, 2014
/   Spotlight

Digital Insight proves that digital bankers actually drive increase engagement and profitability with their financial institution.

Cause and Effect: If you build it, will they come?

July 23, 2014
/   Spotlight

Many financial institutions assume that digital banking is lucrative because the most valuable customers happen to bank online. While there is certainly a correlation between online bankers and higher profitability, quantitative evidence suggests that...

Intuit 2020 Report: The Future of Financial Services

April 11, 2011
/   Insights

Today, Intuit released the latest edition of the Intuit 2020 report, Intuit 2020 Report: The Future of Financial Services, which identifies and examines four key trend areas that will  transform the financial services industry...

Fast Facts: Student Loans

January 22, 2013
/   Insights

The Financial Services Roundtable recently released another iteration of its Fast Facts, reliable, bullet-point research about issues facing the financial services industry. Topics span TARP, Dodd-Frank, insurance, lending, retirement savings and more.  Below are some updated Fast...

Platform Shift in the Making

February 13, 2013
/   Insights

What does the banking industry as a whole have to do with Amazon, Microsoft and Apple? Just about nothing—and down the road, it may turn into a major problem (if it isn’t already). Consider...

The Top 10 Trends in the Digital Banking Industry

December 18, 2013
/   Spotlight

2014 is rapidly approaching and as the year wraps, the Digital Insight team has pulled together the top 10 trends in the digital banking industry based on data and trends from studying financial institutions....

Financial Literacy Month: How are you celebrating?

March 22, 2013
/   Insights

With April approaching, it’s almost time to kick off Financial Literacy Month! Strongly supported by the United States Congress and the Financial Literacy and Education Commission, Financial Literacy Month aims to promote the importance...

For our industry’s purposes, the big news out of Washington has nothing to do with Syria or even the looming government shutdown. No, it’s that with the end of summer, we’ve also seen the end of Larry Summers.

In the face of furious opposition from President Obama’s won party, the former Treasury Secretary has withdrawn his name from consideration to be chairman of the Federal Reserve. By all accounts, the situation was not well handled in the political arena. Up next: Current vice chairwoman Janet Yellen, who should not have to face much political opposition.

And that is ultimately what this is: A political bar brawl, like so many other disputes in Washington. But again, from where we sit, there’s so much more to it.

The new Fed chair will inherit a difficult situation, that’s for sure. But it’s also a huge mistake to assume—as so many pundits across the political spectrum seem to do—that nothing has changed in the five years since the government launched its banking bailout program. In fact, a lot has changed.

Here’s a hint as to how things are different now. Back in 2008, JP Morgan Chase came out of the mess relatively unscathed, and over time developed a reputation for staying out of trouble—a major accomplishment for an institution so large and so prominent. In more recent times that sheen has faded somewhat with numerous scandals, but just last week came the biggest blow of all: The bank agreed to pay regulators nearly $1 billion for a string of regulatory violations, particularly the notorious London Whale trading imbroglio. The money will be paid out to several government agencies, including the Securities and Exchange Commission and the UK Financial Conduct Authority.

In the greater scheme of things, even a billion dollar penalty may not amount to much for a massively wealthy corporation. However, the fines come on top of $6 billion the bank is estimated to have lost in the London Whale fiasco, and at least a couple of company executives have already been indicted. JPMorgan CEO Jamie Dimon initially dismissed the entire affair, but has since found it wiser to be more penitent. This is not how things worked out five years ago.

But here’s an even more concrete reason why this isn’t 2008 revisited: debt.

Back when Lehman crashed and burned, AIG and Bear Stearns were teetering on the brink, and Merrill Lynch thought it best to merge with Bank of America, many of the big institutions had less on hand than they owed. Today, after bailouts, mergers and garage sales of undesirable assets, it’s a very different picture. The Fed reports that financial sector debt has shrunk significantly and the number of bank failures is way down. (For the record, the number of banks is way down too.) On the flip side, consumers have scaled back on debt-driven spending, and the credit card delinquency rate is at its lowest in more than two decades.

None of this is to suggest that the economy or the industry is doing fine. The wave of bank consolidation, which typically follows a bubble, has led to far less competition than before, a potentially major problem. Meanwhile, a healthy level of capitalization hasn’t positively affected the size issue: The banks previously considered too big to fail are bigger than ever. Finally, the industry’s image overall still isn’t nearly where it should be, even as we face serious competition from unlikely rivals such as technology companies.

On a separate but related front, outgoing Fed chair Ben Bernanke is perceived to be sending mixed signals to the market by. . .doing just what he said he would do. More specifically, the Federal Reserve confirmed that it will not reduce the ‘quantitative easing’ program anytime soon. The market didn’t seem to know how to react, though it eventually shot up to close at a record high. The confusion echoes ongoing debate about whether Bernanke should remain at his post.

So that’s the scenario for the next Fed chair, whoever that is. We know the market is much healthier than it used to be, but that doesn’t mean we know how healthy it actually is. And without a true diagnosis, it’s hard to identify a cure.

 

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Marisa Mann

Marisa Mann brings over 15 years of experience in consulting and financial services industries to the Solstice team, working on large scale enterprise initiatives across many technologies, including specializing in the digital space – Internet and mobile. Mann is passionate about mobile and the endless possibilities for the enterprise, delivering business value through strong brand recognition and driving to excellence in the consumer experience. Prior to Solstice, Mann worked at JP Morgan Chase, Diamond Management and Technology Consultants, Washington Mutual, Inc, and Accenture.

Zachary Ehrlich

25-year-old writer, and as a native San Franciscan, I am unreasonably loyal to Bank of America, if only for their superhero-like origin story, involving the 1906 earthquake and Italian fruit vendors.

Brad Strothkamp

http://www.forrester.com/rb/analyst/brad_strothkamp

James W. Gabberty

Gabberty is a professor of information systems at Pace University in New York City. An alumnus of the Massachusetts Institute of Technology and New York University Polytechnic Institute, he has served as an expert witness in telecommunication and information security at the federal and state levels and holds numerous certifications from SANS & ISACA.