Besides putting their money where the returns are better, consumers and companies are borrowing elsewhere, sapping traditional banks of what used to be their only revenue stream. Consumers have turned to mortgage lenders, credit card firms and finance companies for loans. Meantime, businesses of all sizes have embraced the capital markets for their financing needs. Banks are trying to adapt, partly by entering new lines of business, but they have not moved fast enough to keep pace with the strong economy. They continue to receive regular warnings from regulators, including Federal Reserve Chairman Alan Greenspan, about deteriorating loan quality.
Bankers insist that regulators are overdramatizing the situation.
Yet, even in economic clover, banks are posting surprising loan losses. Wachovia Corp., one of the country's most conservative lenders, earlier this year shaved hundreds of millions of dollars from earnings to compensate for bad loans it made. Hits like that have turned most analysts sour on the industry. He and others emphasize that, even if banks' deposits and loans deteriorate further, they are protected now by more capital and geographic diversity than ever factors that could see them through an economic disaster without the massive failures of the 1930s and the early 1990s. Kroszner and others say the system could have weathered the fund's massive loan defaults.