Hard Lessons in Modern Lending

To understand how we got to this point, consider how different banking was a mere 30 years ago. Before ATMs sat on every street corner and sports arenas had names like Citi Field and Bank of America Stadium, U.S. banks were far smaller and far more numerous; in fact, there were about 10,000 more of them. They were, on average, a tenth the size of an average bank today. They were prohibited from operating across state lines, and most states capped the number of branches they could have.

Corporate lending worked differently, too. Companies and banks tended to pair off by size. The community banks that did the bulk of small-business lending tended to make subjective judgments, relying on personal knowledge of the local economy and the character of the local business owners. “You’d go to a loan committee, and there’d be six or eight people who knew the market and probably knew you,” says William Dunkelberg, chief economist at the National Federation of Independent Business, or NFIB, since 1973.

Even by 1993, 55 percent of small-business loans (in dollar terms) were held by banks with less than $1 billion in assets; the largest 25 held less than 9 percent of such loans. The merger wave of the 1980s and ’90s upended this model. As regulations were scaled back, banks joined forces and expanded nationally, and small banks got gobbled up by bigger and bigger ones. This was bad news for entrepreneurs: From 1989 to 1994, the number of small-business loans fell 34 percent, and many economists worried that big banks might stop troubling with them altogether.

Plug: A client of mine is profiled in this Inc. Magazine article.

"The Federal Reserve Bank of New York said documents released Friday showed its officials were concerned about the veracity of the London interbank offered rate in late 2007."

Regulators’ Shake-Up Seen as Missed Bid to Police JPMorgan

Faced with overseeing large banks like JPMorgan, regulators cannot possibly comb through every loan document or trade. Instead, they rely primarily on a bank’s own analysis of its risk, a broad portrait that can mask problems.

“They aren’t examiners as much as they are overseers, forced to peer over the banks’ shoulders,” Bart Dzivi, who served as special counsel to the Federal Crisis Inquiry Commission, said in reference to the general state of large bank supervision.

The New York Fed’s shake-up only aggravated a continuing struggle between JPMorgan executives and regulators from the Office of the Comptroller of the Currency, which supervises banks. For years, the agency, with dozens of its own examiners at JPMorgan, worried that the bank had been miscalculating how much money it could lose in extreme situations, according to the current and former officials.

Examiners challenged the executives who stonewalled, and the conflict left agency supervisors with an incomplete picture of the bank’s risk. At one point in early 2012, JPMorgan briefly stopped providing examiners with an important risk estimate for the chief investment office, the group at the center of the recent trading losses, the current and former officials said. Executives told examiners not to worry.

Even after backlash, banks quietly pursuing fees

Nothing in banking is free anymore. All of the largest banks in the United States offered free checking with no strings attached until 2009, and almost none do today, says Mike Moebs, the founder of Moebs Services, a financial research company. And what wasn’t free before costs a lot more these days: Moebs’ research shows that cashiers’ checks that used to cost $3 now cost as much as $12, and the cost to get money orders has doubled to $2 at the largest banks.

The big banks are public companies and are expected to make a profit somehow. And it’s not as easy as it used to be.

Historically, banks have made money off of something called interest rate spreads. They borrowed money cheaply, loaned it out at higher interest rates and pocketed the difference.

But interest rates are at historic lows, making it harder for banks to charge high rates when they lend and squeezing their profits.

Regulatory rules since 2009 have also curtailed traditional bank fees, costing them billions of dollars. Banks were barred in 2010 from automatically enrolling customers in a service that charged them as much as $35 for overdrafts on their checking accounts. Another law barred banks from charging fees and changing interest rates on credit cards without notifying customers.

Banks Quietly Ramping Up Costs to Consumers

Even as Bank of America and other major lenders back away from charging customers to use their debit cards, many banks have been quietly imposing other new fees.

Need to replace a lost debit card? Bank of America now charges $5 — or $20 for rush delivery.

Deposit money with a mobile phone? At U.S. Bancorp, it is now 50 cents a check.

Want cash wired to your account? Starting in December, that will cost $15 for each incoming domestic payment at TD Bank. Facing a reaction from an angry public and heightened scrutiny from regulators, banks are turning to all sorts of fees that fly under the radar. Everything, it seems, has a price.