It almost goes without mentioning that the current financial situation will affect the future trends of the banking industry. The landscape of the banking scene has changed dramatically over the last year and even weeks time. Giant names such as Merrill Lynch, Bear Stearns, and Washington Mutual are effectively insolvent. Seven hundred billion dollars has been approved for cleaning up the balance sheets of other ailing financial institutions and regulators will almost surely be paying much closer attention to the finance industry in general and rating agencies who gave their securities AAA ratings. Regulation in combination with developing new methods for evaluating the health of our financial system and stricter lending practices are two main trends that we will likely see in the banking industry. (To read an article about current discussion on too big to fail please see this post)

Both sides of the political spectrum have recognized that the financial system as it stands today has not worked. The deregulation of the industry which included the repeal of the Glass Steagal Act meant that banks could take part in many aspects of the financial industry that before was not allowed. Commercial banks and investment banks were granted the ability to cross expose themselves to exotic assets that created the bubble we are experiencing today. The large price tag to the American people for the bailout plan will demand that this does not happen again and a return to regulating the industry seems likely.

In the near future, another unfortunate trend, at least for those in the industry, is that more banks might fail. One analyst from Stanford Financial wrote in the Associated Press that he expected more than 100 banks to fail next year. Whether or not you subscribe to this prediction, the fact that statements such as these are being published in the mainstream press illustrates that the banking environment going forward will be rocky.

As consumers become increasingly more comfortable with bringing their financial transactions online, firms that wish to stay current with social trends will need to invest in the technology and infrastructure needed to compete. Complying with regulation for online transactions and maintaining a secure network are costly and many smaller institutions cannot bear the costs. A labor market information study, conducted by the state of Minnesota, stated that they believe small and medium size banks that were not exposed to the troubled real estate market will see it as advantageous to consolidate so that they can achieve the economies of scale necessary to implement the new technologies that the industry increasingly has become reliant on.

The era of investment banking as we know it has come to a sudden end. Goldman Sachs and Morgan Stanley, the two remaining large investment banks have officially switched their status to commercial banks so that they can take in much needed deposits. Banks, especially large ones, will find that compensation for its executives will be closely monitored if not limited as the bailout plan seeks to reign in on bloated salaries. The industry will need to adapt and change the model for success to stay afloat in the coming years. A new era of banking is on the horizon.