Recession Brings Tough Times to Local Banks

The economic recession and budget slump plaguing Massachusetts have meant hard times for businesses across the state, even those with seemingly countless stack of money--the banks.

Shaken by the January collapse of the Bank of New England and earlier bank failures in Rhode Island and Massachusetts, Cambridge banks are taking stock of the changing economy and trying to rebuild their customer's trust.

"The roaring 1980s are gone. The go-go days are over," said Michael D. Holmes '57, President of BayBank Harvard Trust. "It's a more conservation time."

Although Holmes said BayBank Harvard Trust is still opening large numbers of new accounts, he admits that the Harvard Square-based bank has seen a markedly more cautious attitude from its customers since the recession settled in.

"Our retail and corporate customers both seem to be very cautious. And I think they're right to be," Holmes said.

"It's a wait-and-see attitude, particularly with the crisis in the Gulf," added Elaine F. Tracey, senior vice-president of Public Relations for the bank.

Feeling the Pinch

Other Cambridge banks are feeling the pinch as well. William F. McGilzreay, senior vice-president and treasurer of the East Cambridge Savings Bank, noted that while the national recession did not hit full-force until the end of 1990, New England has been in the economic duldrums for well over a year.

McGilzreay said that the East Cambridge Savings Bank's specialty in home mortgages--a market that remains strong despite the recession--has protected it from some of the problems facing banks which specialize in retail and corporate lending.

"We're not really as hurt by this as some other banks, but there's unquestionably been a horrible impact on banks overall," he says.

A conservative lending policy and emphasis on customer relations have helped the Cambridgeport Bank to prosper when others are failing, says bank president James B. Keegan '63.

But worries that formerly reliable customers may be unable to reply loans are forcing even the healthiest of banks to revise their management strategies. Cambridgeport Bank started building up a huge reserve against possible future loan losses when the Massachusetts credit crunch began, Keegan said.

"We want to set up a fortress reserve so we don't have to worry about non-performing loans," he said.

And some of the stronger banks may actually profit from the disaster, McGilzreay said. Security concerns are forcing borrowed to choose stable, established banks over their weaker competitors, which usually compete by offering higher interest rates.

"Customers are exhibiting more of an awareness of safety right now than in the past," he said.

Confidence Crash

Many banks point to the fall of the Bank of New England as a major culprit in undermining customer trust in the banking industry.

"The public in general has been unnerved by the Bank of New England collapse," McGilzreay said, pointing out that 11 other Massachusetts banks also collapsed in the past year.

Yet with the exception of a run on the Bank of New England the day it announced its insolvency, the mile-long lines to withdraw deposits that were so familiar during the Great Depression have been noticably absent.

The depositors' sense of security can be attributed in part to the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve's expansionary actions, which have cushioned the impact of the bank failures, Holmes said.

"Since the FDIC stepped in the said they would insure any amount, there really wasn't much of a reaction of panic here," Holmes said.

To counter the recession, the Federal Reserve has loosened its grip on the money supply, bringing interest rates down and expanding the economy's cash flow, said both Holmes and McGilzreay.

"There's plenty of money around," Holmes said. "What we have to do is rebuild everyone's confidence."

Harvard's role

Keegan pointed out that Cambridge banks also reap economic cushioning from their reliably wealthy neighbor--Harvard University

As the city's largest employer, the university is continuing to operate at full capacity despite the recession.

Along with MIT, another of Cambridge's top employers, Harvard is holding the city's unemployment down and its infrastructure intact and healthy, Keegan said.