2 Big Trends in Banking Over the Past 25 Years

Consumers have become more aware of how much they’re paying for various banking and investment services, and thanks to post-financial crisis reforms, banks need to take steps to avoid another near-collapse of the financial system.

In this segment from Industry Focus: Financials, host Michael Douglass and Fool contributor Matthew Frankel explain how these two areas have changed over the past quarter-century, and what it has meant to consumers.

A full transcript follows the video.

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This video was recorded on June 25, 2018.

Michael Douglass: Let’s also talk a little bit about something that The Fool has certainly been involved in, and it’s certainly been a symptom, you might say, of the broader expansion of the internet, which is this idea of fee awareness. People have become so much more aware of the fees they’re paying, in part because there are sites, like fool.com — and, of course, like a number of sites online, you can probably imagine them, dear listeners, and you probably know of plenty that I don’t even know about — that compare these fees and help you understand, “OK, here’s how this works, here’s what this is actually going to cost.” That’s really helped bring a lot of transparency and further fee reductions as people have better-understood what they’re really paying for the services.

Matt Frankel: Yeah. I’m surprised fees on things like checking accounts and things like that haven’t really come down yet. But in terms of investments, there seems to always be someone who’s willing to do it cheaper. Vanguard is a big example of one of the pioneers in this space, really low-cost investment products. They make almost nothing on some of their most popular ETFs. And just because of the volume, they’re actually making a fair amount of money on them.

It’s just, the trend has been toward lower and lower fees, and people have become much more aware — and want to be aware — of the fees they’re paying before they enter a relationship, which really was not the case 25 years ago. If you had a stockbroker, the commissions you paid were really, in many cases, not very transparent. Banking fees were tougher to understand because certain reforms that have been enacted between then and now didn’t exist. More transparency exists because that’s what customers are demanding these days. And, as we said, a general lower trend.

Douglass: Yeah. And, in the past 25 years, we should also note — you teed this up very nicely, Matt — regulations have changed. Gosh, it’s almost like we prepare these shows beforehand a little bit, right? What a concept! [laughs] But, in the aftermath of the financial crisis — which obviously was a big event over the past 25 years, one of the largest recessions in the United States’ history — Dodd-Frank regulations defined a systemically important financial institution, or SIFI, and also prohibited certain types of investments by a bank. Of course, as we discussed in an episode just a week or two ago, there have been some changes and some rollbacks of some of the Dodd-Frank reforms.

Frankel: Yeah. The Dodd-Frank reforms were the biggest regulatory action in the past 25 years, hands down. That 25-year period does not include the savings and loan crisis that happened just before, so these are the biggest reforms. They pretty much defined what too-big-to-fail means, and put steps in place to ensure that those institutions are not in a position where they would fail.

This is generally a great step. It seems that they might have gone a little too far, which is why some of the rollbacks in the regulations were done a couple of weeks ago, relaxing what the systemically important financial institution standard is and letting some of the smaller banks take on a little more risk.

But, regulation has certainly come a long way. There was no such thing as too-big-to-fail back in 1993. First of all, like I said, the four biggest banks were not nearly as big as they are right now. If one of them failed, it would just be inconceivable in 1993; whereas now, after the financial crisis, it’s like, “Hey, these are actually pretty vulnerable when they’re not run correctly.”

Douglass: Yeah, it’s highly conceivable today because we’ve seen it happen — well, or, let’s say, seen it get pretty close. The financial system got very close to melting down.

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