Some banks have tried to offset their higher cost of funds by focusing on activities where they have a comparative advantage and shedding operations that, upon close scrutiny, do not generate sufficient returns. Other banks have been more aggressive in raising funds from nontraditional sources to dampen the effect of higher-cost deposits. In other cases, bankers argued that insured deposits at a low cost still exist if a bank can tap into previously overlooked consumers who may not have a long track record with banks. This list of bank responses gives only a hint for the myriad ways that banks have responded to the new environment. While I was very impressed with the innovative nature of the banks' responses, I am not surprised about the general trend.
Price signals are powerful means for altering behavior.
Banks subject to higher input costs will devise and test strategies to maintain profitability that observers could not have predicted. More government intervention is unwarranted My description so far makes clear why I view the current situation as manageable, but it also suggests why others wave the crisis banner. Certainly not all banks will meet the challenges of the new environment successfully. Because of lower future returns, these banks may end up shrinking in size and even ceasing to exist. As I noted earlier, borrowers that rely exclusively on banks for credit could also face more expensive borrowing as banks pass on the higher costs of funds.