Examining Today’s Banking Landscape

Professor Thomas Pieplow, Ph.D., of Athens State University offers his insights on the state of banking.
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From the dramatic breakdowns of major banks to historically low interest rates on CDs, savings and money market accounts, the recent era has yielded no shortage of unusual banking conditions. For insights on the state of banking and interest rates today, Thomas Pieplow, Ph.D., associate professor and department chair in the College of Business at Athens State University in Athens, Ala., offered these thoughts on the stock market, the nature of modern banking and the future of deposit rates.

MoneyRates.com: Could the surging stock market weather a spike in interest rates?

Pieplow: It certainly depends on the magnitude and duration but I believe the stock market would remain healthy and respond favorably to an increases in rates, provided any increase is moderate and not continual. I sense investors anticipate that a market correction is in order and will react accordingly when it happens. Another reason for my confidence is because when we examine the financial posture and balance sheets for many of the largest domestic and international corporations we find strong revenues, low debt, sustained profitability and cash available for ready investment. This is why mutual funds focused on companies having higher than normal dividends, equity, growth and income are performing so well.

Should the deposits-and-lending side of banking be more separate from the investing side?

In my view, separating the two is virtually impossible if you expect institutions to compete in today’s global markets. That said, financial institutions cannot run unfettered and if the federal government is providing a “backstop,” there are reasonable accommodations to have these government protections. As an example, the government has a responsibility to fully meet the $250,000 threshold for deposits made with any FDIC-insured depository institutions, and history demonstrates they are performing exceptionally well. The FDIC has satisfied every obligation to consumers at full insured value, and any lost money comes from institutions outside of the FDIC’s umbrella or from deposits exceeding coverage limitations.

Please understand I do not believe the government holds the answer for any problem, but taxpayers could ultimately be responsible for any payments made by the FDIC that exceeds the fund’s ability to pay. The FDIC has taken a proactive role in supervising and auditing banks and it is my opinion that it is judicious to expect all insured institutions to comply with reasonable standards. These standards should constantly be assessed and when found to be no longer relevant, revised or even discarded. But if a bank wants to assure its customers that deposits are insured, there are reasonable criteria the institution must be willing to satisfy to have this protection and these criteria can vary by institution. What I would prefer is the market to manage this with informed consumers making their own decisions. If I choose to place my savings with an investment bank that pays a 10 percent interest rate for a normal savings account but that institution is not insured by the FDIC, I should have the right to make that decision. I simply believe consumers are best at assessing individual risk/reward decisions.

Where do you see deposit rates one year from now?

With rates near zero today, I believe I am safe in saying they will not decline over what we see today. But I also do not see significant growth. Global economic activity is on the upswing, but I do not see a significant pent-up demand. Every industrialized region faces challenges, and with cheap money readily available from safe havens, I do not see the inflationary pressures that others do. As I mentioned earlier, the best sanctuary I see today is with those mutual funds focused on high-quality companies providing growth, equity, dividends, and income.

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