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Peter Crabb: Can Idaho banks help stem the flight of low-income bank customers to payday lenders?

While a new crisis looms in for big banks in Europe, large United States banks are in good financial shape. Why then are they losing customers?

U.S. bank profitability has greatly improved. Return on assets, the key measure of profitability for a bank, has risen from basically zero in the summer of 2009 to 0.85 percent today. For the nation’s largest banks. profitability is closer to the long-term average of 0.97 percent.

Bank profits are on the rise, but banking customers are on the decline. While the total amount of cash held in checking accounts is up, the number of clients for all these accounts is lower.

There are about 1,000 fewer commercial banks in U.S. today than in 2006. The value of small certificates of deposits is down by 50 percent since 2006. The total number of loans at U.S. commercial banks has also fallen 6 percent in just the last three years.

Government-imposed price controls are driving customers away.

The banking industry is responding to new rules from Congress and the Federal Reserve about what they can charge on customer accounts and how they can invest the bank’s capital with higher fees on consumer accounts. Bank of America and other large institutions are raising debit-card and checking-account fees.

With bank charges rising, low-income customers are turning to nonbank financial-services companies. According to a 2009 study by the Federal Deposit Insurance Corp., about 6.7 percent of Idaho’s population is unbanked, meaning they do not use traditional banks for basic financial services. This rate is slightly below the national average but undoubtedly rising with the weak economy and poor job outlook.

The stock market had a rough summer and remains flat for the year, but one sector is on a roll: payday lenders and pawn shops. The stock price of payday lender Advance America has more than doubled since last October. Cash America International Inc. has seen its stock rise 50 percent over the same period.

Previous bank customers are turning more and more to payday lenders for check-cashing and short-term loans. This move will cost them dearly. The annual interest rate on short-term loans at these establishments can easily run more than 500 percent.

Small, locally owned Idaho banking institutions could bring these potential customers back to the system, since their size exempts them from most of the new banking regulations.

Unfortunately, Idaho’s banking industry is weak and unprofitable. Return on assets at the 18 financial institutions the FDIC tracks in Idaho rose this year to a negative 0.07 from a negative 0.55 percent in 2009, still well below the 0.87 percent earned in 2008. The improvement, however, is due primarily to fewer write-offs of bad loans. As of June 30, total net interest income at Idaho banks is off 12 percent over the last three years.

As conditions improve, our local banks will hopefully keep account fees low and prevent more Idaho households from losing their shirts at the payday lenders.

Peter Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. Reach him at prcrabb@nnu.edu.

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