Risky Rewards

By James Grant

THE BANKERS

by MARTIN MAYER

566 pages. We/bright & Talley. $15.

Despite the confident, conservative tone of their advertising, banks are no longer simply depositories and prudent lenders of other people's money. The past decade has seen most major banks turn into high-powered financial conglomerates ardently pursuing the Great God Growth. But with their brighter balance sheets have also come greater risks--a disturbing fact that was dramatically demonstrated in the past year by an unusual string of bank failures in the U.S. and Europe.

Understanding the changes that have taken place inside the sleek temples of modern finance would require a cram course in the complex ways of banking. Fortunately Martin Mayer has done the necessary homework for interested laymen: he offers a clear, detailed and well-paced book about one of the nation's least understood institutions.

Mayer, an economic expert and probing author of such books as Madison Avenue, U.S.A. and The Lawyers, examines the standards used by banks to decide who will--and who will not--get a personal loan. He looks into the cozy relationships between many senior loan officers and their favorite corporate clients and considers the swelling torrent of bank paper work--28 billion checks in 1974 alone--that each year threatens to swamp the entire system.

Far more serious, in Mayer's view, is that banking's rush to expand could be setting the stage for a monumental economic disaster. Banks, he notes, have now spread their operations to include major leasing firms and finance companies. Almost any bank that can afford a brass name plate has opened branches in Europe, Asia, South America and elsewhere. All this, Mayer believes, has focused bankers' attention away from their basic task of channeling the idle money of businesses and individuals into productive uses that promise to benefit the entire economy.

The trend toward bigness made sense when it began in the mid-1960s. To accommodate the financial needs of a rapidly enlarging economy, banks had to grow--and were encouraged by Government regulators to do so. And bankers did not have to have their arms twisted to take full advantage of a profitable situation. Mayer's concern is about the way banks have sought to fuel their growth by boosting income on loans. In the past, he explains, banks drew mostly on the money of their depositors or on bank investments in notes and bonds to accommodate borrowers. When their capital reserves became strained, banks simply cut back on loans.

Bloated Demand. But once bitten by the growth bug, many banks threw off the old restraints. They now compete vigorously for loan customers and meet the pumped-up demands for loans with money they themselves borrow--from each other, the public and the largely unregulated Eurodollar market. Such go-go lending policies, Mayer believes, bloated business and consumer demand and contributed in no small way to the present inflation rate. Banks also damage the economy, says the author, by going to capital markets to borrow a large proportion of the money they lend. The practice weakens the Federal Reserve Board's less-than-perfect methods for regulating the nation's money supply and thus undermines Government efforts to restrain the current explosive rise in prices. In addition, by competing with other businessmen for available funds, banks themselves have helped kick up interest rates, which last year climbed to record levels.

Mayer's most worrisome charge is that because of risky lending policies, banks now carry billions of dollars of uncollectible loans on their books. These losses, says Mayer, are adding to the already strained resources of a growing number of institutions, not all of them small. As a result, the Federal Reserve Board and the bank regulating agencies are wary of tightening up too drastically for fear of causing more bank failures and intensifying public distrust of the entire financial system.

Mayer argues that a Government crackdown now would be far less risky than accepting the present situation. "The banking structure that is now building can collapse," he warns flatly. "The larger the regulatory apparatus permits it to grow, the more catastrophic the collapse will be." Should it occur, neither the public nor the men who supervise the nation's banks will be able to say that they have not been warned.

qed James Grant

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