In "Miami Vice," the movie, detectives Sonny Crockett and Rico Tubbs successfully duke it out with a Colombian drug cartel only to be frustrated in the end by a senior American banking official in a palatial New York office. The high-ranking banker, treating actors Colin Farrell and Jamie Foxx like they were 2-year-olds, explains that he can't allow them to get in the way of the bank's highly lucrative relationships with drug syndicates.
I found myself thinking, "Can they really do that? Was there an element of truth?"
Well, truth is stranger than fiction. We learned in March that one of our major banks just paid a $160 million fine for money laundering. How many more banks are left to get caught?
Then, last week The New York Times revealed that one of that same bank's employees had earlier resigned in disgust because he could not get senior executives to respond to his claims that the bank was acting illegally. I won't mention the major bank, because it's suffered enough already and many of its great employees have been badly hurt, but it brings me to my point. We should all be as circumspect these days as we decide who gets our banking business.
It is hard to understand what a normal person has to gain by dealing with a large multinational "too-big-to-fail" institution. As is true in many industries, computerization that costs next to nothing has more than leveled the playing field. A meritocracy of small financial institutions has bludgeoned what was once the aristocracy of big banks. The days when you had to have floors full of million-dollar IBM 360 computers to run a financial institution are over. There are no longer any "economies of scale." Bigger is no longer better.
Smaller regional banks are simply more efficient. The larger a bank gets, the more it needs layers and layers of management people hovering over one another and ultimately over the people in the trenches delivering what bank customers are buying.
With all those mouths to feed, big banks are under tremendous pressure to generate profits. It explains why they all ignored red flags before the financial crisis. It also explains why some bankers would stoop to doing business with criminals. Creeping into the culture of large institutions is the "IBG" factor which translates as "I'll be gone." By the time trouble becomes apparent, the perpetrators will have left.
Small banks operate in a different world. Personal reputations are at stake. There's no "IBG" factor in a small town where everyone knows your name. Here in Northern California, communities are full of regional banks that are often owned by community leaders and local investors.
If you're a small-business person, you know the people handling your loan, and they probably own enough of the bank's shares themselves so that they won't be part of some revolving door of personnel. If you're a bank customer with a checking and savings account plus some CDs, you won't be hassled by what would be the big banks' cross-selling strategies.
Common among these is the attempt to foist off some expensive annuities or commission-loaded mutual funds in the "wealth management" divisions. By comparison, small banks are too busy building relationships and providing basic banking services. And, they are not burdened by some predecessor's misguided attempt to create a financial supermarket.
It stands to reason that a growing number of big bank customers will conquer their "status quo bias" and think about keeping their money closer to home.