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A Good Time and Place to Be a Banker

Despite low interest rates and the costs of anti-terror regulations, local institutions are humming alongFor the last few years, the Federal Reserve and the USA PATRIOT Act have been ganging up on the banking industry. Short-term wholesale interest rates set by the Fed that influence bank rates have risen, while long-term rates—dictated by the market—have slumbered, hurting banks’ profits. National anti-terrorism laws calling for increased monitoring of customers and their transactions have raised costs for financial institutions. But New Jersey banks are still smiling.

“You have the worldwide financial centers in New York City flanked by New Jersey and Connecticut, two of the wealthiest states in the nation,” says Don Scarry, principal economist of New Jersey Economics, a Mount Laurel-based consulting firm. “So you want to make your deposits and loans here.”

Job growth in the Garden State has slowed recently but two classic indicators of economic health—income levels and housing costs—support Scarry’s case. With an average median income per household of $56,772, New Jersey ranked second behind New Hampshire in the country from 2002 to 2004, according to the U.S. Census Bureau. And New Jersey housing prices have been growing at a much faster clip than the rest of the country. Prices climbed by 17.8% from the second quarter in 2004 to the second quarter in 2005, ranking ninth in the country for rate of increase, according to the Office of Federal Housing Enterprise Oversight.

Scarry says that an increase in start-up companies, which are dependent on loans to get off the ground, and a growing venture capital market have also helped to offset the negative effects of forces like the PATRIOT Act.

“Banks are attracted here because of their ability to raise deposits from wealthy people and translate those deposits into pretty stable, productive loans,” Scarry says.

When in 2001 President George W. Bush signed the USA PATRIOT Act in response to the 9/11 terrorist attacks, costs to small banks weren’t the first thing on people’s minds. But it enabled or augmented “numerous provisions for fighting international money laundering and blocking terrorist access to the U.S. financial system,” according to a 2001 memo from the Board of Governors of the Federal Reserve System. Recently renewed, the act requires banks to research potential customers and report suspicious transactions. Information requested by regulatory agencies must be reported within 120 hours. This can be very expensive for banks to do.

“It’s harder for a smaller bank, with a smaller staff, than it is for a larger bank to absorb the costs involved with these regulations,” says Jim Meredith, senior vice president of the New Jersey League of Community Bankers, a trade association representing 75 local banks based in Cranford.

Another squeeze felt by the banking industry has been the changing relationship between short-term interest rates, such as interest money paid out on savings accounts, and long-term interest rates on financial vehicles like mortgages that bring money in.

Short-term rates have traditionally been lower than long-term rates, creating what is often referred to as a “normal yield curve.” This is due to the shape revealed by a graph of the numbers. Experts say that curve has been flattening because the Federal Reserve has steadily raised rates over the last few years while long-term rates have remained about the same. Since long-term rates normally rise with short-term rates, bank profits have suffered, according to Meredith.

But Garden State banks continue to find the green lining through the federal clouds. The FDIC shows a slight increase in branches in New Jersey, up from 3,018 in the second quarter of 2004 to 3,089 in the second quarter of 2005. Meredith says this can be attributed in part to marketing firms’ insights that the state’s growing ethnic communities, particularly Asians and Hispanics, prefer face-to-face banking in spite of the growing popularity of online banking.

As long as the many affluent residents and businesses in New Jersey keep making, depositing and borrowing money, New Jersey banks will feel good about the state.

“The secret of banking is still making sure that your cost of acquiring funds is lower than the cost at which you lend them out,” says Scarry. “You have to roll them out in a way that balances risk and reward. And New Jersey banks are significantly good at that.”

E-mail to tgaudio@njbiz.com

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