Research Proposal on "Economic Stimulus"

Research Proposal 9 pages (2615 words) Sources: 5 Style: MLA

[EXCERPT] . . . .

Economic Stimulus, Banking Firms, and Their Performances:

The Current U.S. Financial Environment and What Comes Next

The banking industry in the U.S. has been strongly and negatively impacted by the current financial situation of the country, particularly with regard to the subprime mortgage crisis. This crisis became very obvious in 2007 and, since then, there have been a lot of related problems. Banks have been bailed out, and so have homeowners, all as part of the Obama Administration's economic stimulus package. This package was designed to create jobs, help people keep their homes, and let the country move forward, but there have been many people who have complained about the stimulus, as well. These people do not feel that the stimulus package has done (and is doing) enough to move the country forward. Housing and banking are two of the biggest sticking points, followed closely by job creation and the speed at which the stimulus money is being distributed.

After the housing bubble finally burst, there were high default rates on both subprime and adjustable rate mortgages. These were some of the largest triggers of the U.S. financial crisis, but they were not the only difficulties that the economy was facing. The serious problems with the housing market were due largely to the amount of lost equity value in consumers' homes. This offered little incentive to pay back high-interest and expensive loans that had been awarded through a lot of predatory lending, credit conditions that were far too lenient, and federal deregulation of the lending industry prior to the crisis (Steverman, 2008). The subprime mortgage loan foreclosure epidemic (See Fig 1) caused lower cash flow for most banks, eroded financial health of institutions that had mortgage-backed securities, and also restricted lending practices. This created a vicious cycle that clearly needed to be broken, but what do to about it was something that was hotly debated -- and often still is (see Fig 2).

Companies like Regions Bank and Bank of America have seen a serious downturn in their market performance because of the economic crisis, partly due to the increase in consumer dissatisfaction with what banks can offer and whether they can do anything about the problems that their customers were facing with their loans. In a 2008 Retail Banking Satisfaction Study of almost 20 thousand U.S. households, the results showed consumers held banks "directly responsible for the current housing and mortgage crisis," and that is according to Rockwell Clancy, who is an executive director at J.D. Power and Associates (January 2008). Clancy (2008) went on to say that: "Many retail banks are experiencing a decline in their brand image, especially in the current economic climate. With customers experiencing more problems, longer wait times and more fees, that negative view is intensified."

In the above study, which also included rankings for sixteen banks, Bank of America was ranked 12th, and Regions appeared in last place in the survey. Because of this severe loss of overall consumer confidence and market performance, both of those banks have tried to ramp up efforts to serve their customers. That means, among other things, working with customers to keep them coming back and working with them to modify their home loans if they are having trouble paying for their homes and meeting their obligations. Regions has also launched an entirely new marketing strategy which has been reflected on their website. It is a mantra, or credo, of sorts and says, in part: "You can expect more from us, because we expect more from ourselves" (www.regionsbank.com).

The company also highlights various industry awards that it has received in an effort to show customers how much they can be trusted, and how they are still able to do what they have promised despite the economic difficulties. One of the awards they list is the 2009 "Most Improved in Customer Service" award, and it promises consumers that they "come first." Similarly, in order to improve the market performance of its company, Bank of America has also geared itself up to improve its brand image as a socially responsible institution.

B of A is doing this in the hope of attracting and retaining consumers who believe that the company is going to put them first. So many banks had been collapsing that people were getting very nervous about whether their money and mortgages were safe at the bank that they were using. Bank of America is planning to use stimulus money for eco-friendly buildings, planned spending for "green" projects, employee eco-conscious incentives, and energy efficient loan incentives (Bank, 2008; Credit, 2007). These all add up to banking that a customer can feel good about, and can feel is going to remain around for some time. Donations to health clinics and homeless shelters (Kowalczyk, 2007), community development plan lending, and pledges totaling more than $350 billion toward job creation in neighborhoods that are disadvantaged (Freer, 2007) are also additional incentives that Bank of America has explored. This has been done to increase market performance through brand enhancement and a promotion of a sense of well-being for the customers.

The ongoing financial crisis of 2007 started an extreme rise in mortgage delinquencies and foreclosures around the United States. This had devastating effects on the financial performance of banks and lending institutions all across the globe (Anderson 2009). Furthermore, the weaknesses that was seen in the foundations of both private and federal finance systems were exposed, and consequences have been devastating and informative for the companies that are still remaining in the industry. The banking system itself remains very unstable despite the economic stimulus money that the Obama Administration has put out there to help businesses big and small remain open, and the process of recreating a business model for sound banking is already underway at a lot of regional and national banking chains (Green, Oct 2008).

Many banks reacted very strongly to the first signs of a mortgage crisis and changed the way that they did business. That was started by shying away from mortgage-based lending portfolios, because they caused too much risk for the banks if the mortgage market took a downturn. As consumers continued to experience a decline in their home prices, rising unemployment, and restricted credit lines, banks like Wachovia Corporation reacted exactly as could be expected: it reached out for a lifeline. On October 12, 2008, the Federal Reserve approved Wells Fargo's takeover of Wachovia, and allowed the creation of the largest bank network within the United States. Without stimulus money, a lot of banks and other companies would not have been able to move forward with takeover plans and other things that allowed them to keep operating properly in this economy.

On December 31, 2008, Wells Fargo paid $15.1 billion -- around $7 per share -- to buy Wachovia. As an independent company, it is now seen as the fourth-largest bank holding company within the United States, if one bases that on total assets. Before the acquisition by Wells Fargo, Wachovia purchased a few other financial services companies, It did this in an attempt to become a more national bank and a comprehensive financial services company. It was trying to expand, but when the economy took a downturn Wachovia found that it was greatly overextended. With the Wells Fargo buyout, Wachovia's growth goals are now finally being realized, and it has shown continued steady growth and a deliberate pace of conversion. That appears to have protected the brand image against any kind of customer fallout. For several years now, Wachovia has been ranked number one in customer satisfaction among all of the major banks on the University of Michigan's annual American Customer Satisfaction Index (2007). Compared to Wachovia's score of 76 out of 100, its competitor Bank of America only scored 73, coming in a close second (ACSI.org).

In comparison to the pre-merger financial growth of Wachovia, BBVA Compass is a financial holding company that has $47 billion in assets and is also one of the nation's largest banks. Based in Birmingham, Alabama, the bank became BBVA Compass in February of 2007 when it was bought out by Banco Bilbao Vizcaya Argentaria, which is the second largest bank in Spain. This acquisition is an example that has not that often been considered: foreign institutions bailing out failing U.S. banking giants and other companies, rather than the U.S. doing it through stimulus money. BBVA Compass gave the parent corporation a very substantial stakehold in the U.S. banking sector, since it created the biggest financial institution in the lower regions of the U.S. (Florida, Alabama, Colorado, Arizona, New Mexico, and Texas).

As banks continue to compete to meet shareholders' expectations and they continue to struggle to stay afloat even with the economic stimulus package, it has become very crucial that they review and adapt the corporate goals that they have to better survive the economic condition that consumers find themselves in today. Customer buying power is at an all time low even though there have been… READ MORE

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