Banking Is Still a Wonderful Life

If there ever was a good time to be a banker, this would be it.

Most of the big banks are out with their first-quarter profits this week, and once again they are at record levels, as they were for much of last year. (Wachovia's net is up 30 percent, Suntrust's 36 percent and Bank of America's 75 percent from the comparable period last year.) Deposits are up, as are consumer lending and fees from investment banking, while most of the scandals are behind them. Bank stocks are on the rise, as are the annual pay packages of big bank chief executives, which now routinely top $15 million.

Much of the credit for this improvement in bank economics goes to consolidation and new technology, which have allowed banks to cut a huge chunk of their operating costs. It turns out there were significant scale efficiencies to be gained by combining back offices and branch networks. In addition, ATMs, automatic deposits, online bill paying and computerized loan approvals have allowed banks to shrink payrolls even as they grow their businesses.

So far, however, there is little evidence that all this new efficiency has benefited consumers in the form of lower fees and higher interest rates on deposits. Whereas in the past, banks were happy with net interest spreads -- roughly speaking, the interest rate difference between what banks pay depositors and what they charge borrowers -- of 2 percentage points, spreads now routinely top 3 percentage points. And fees for things like ATM withdrawals or bounced checks are higher in both absolute terms and as a share of bank profits.

The numbers for all this are surprisingly difficult to tease out from financial statements and regulatory filings. They bounce around from year to year and bank to bank, complicated by the effect of mergers. But it seems clear from conversations with local bankers that, rather than compete for depositors on the basis of price, banks have decided they are better off competing on the basis of service.

There are several possible explanations. As in any industry dominated by a handful of major players, price wars are not a very attractive strategy. Any bank that makes the first move to cut fees or raise deposit rates knows all too well that other banks have the wherewithal to match its offer. The resulting stalemate won't change anyone's market share, but it will lower everyone's profits.

If you doubt this, simply pick up any newspaper. A decade ago, business sections were chock full of ads offering come-on rates for various types of deposits. Today, you'll find such ads only from smaller banks that cannot compete on the basis of branch networks or technology. The big boys prefer a more gentlemanly competition.

Another explanation may be that, in a low-interest-rate environment, the difference between getting 1 percent or 1.25 percent on checking deposits, while significant on a percentage basis, isn't really enough to get many consumers to switch banks. Rather, consumers seem to put higher value on the convenience of having Saturday hours or a branch near their home. As a result, a decade after many bank visionaries predicted the demise of branch banking, banks are now fighting over the best locations for new store locations.

These new branches, like all the new technology, are expensive. But they are still less expensive, and more effective, than trying to attract deposits by raising rates or waiving those annoying fees for withdrawals from other banks' ATMs. Those enticements, it turns out, are reserved for customers willing to "deepen" their relationship with the bank by taking out loans or using bank brokerage services, which is where even larger profits can be made.

So has bank consolidation been good for consumers? A definitive analysis is yet to be done by the Federal Reserve, which lustily approved every major merger over the past 20 years. But so far, the anecdotal evidence is that while consolidation hasn't done much to lower the price, it has improved the breadth and convenience of banking services. Certainly it has significantly enhanced bank profits. And it has brought the compensation of top bank executives to levels their predecessors never dreamed of.

Steven Pearlstein can be reached at pearlsteins@washpost.com.