"What's the capital of Iceland? ... One pound-fifty," quipped a financial consultant BS&T met at a conference in mid-October. For the Briton, though, it wasn't really a laughing matter, as his wife was 25,000 pounds sterling (US$43,250) out of pocket since an Icelandic bank with which she had an online savings account was gone, Iceland's government unable to meet its guarantee to insure deposits and the U.K. government suing the Icelandic government.

Yes, it's been some month or two: a Western, democratic country going bankrupt (Iceland); the U.S. national debt clock in Times Square running out of digits; the Dow losing $1.2 trillion in a day; the disappearance of Wall Street as we know it; more failures of banking monoliths worldwide; the U.S. and U.K. governments taking part ownership of failing banks; and unprecedented concerted action by central banks worldwide to stop the chaos -- all of which provides some flavor of the financial times.

"Europe may enter recession before the U.S.," says Austin Hughes, chief economist with Dublin-based IIB Bank, a unit of top 50 global bank KCB Bank (Brussels; US$422 billion in assets). According to an October 15 BBC report, U.K. unemployment hit an eight-year high in August.

Clearly no one will remain unaffected by the crisis. How banks fare, and how their technology budgets will be shaped, depend partly on the new competitive landscape.

Assuming a bank survives, it now has new competition. Pure investment banks are gone, with hybrids -- depositories with major securities units -- their new form. Also, a select class of huge U.S. banks, with about 5,000 branches spread coast to coast, is emerging -- seemingly a factor in San Francisco-based Wells Fargo's and Citi's (New York; $2.1 trillion in assets) recent titanic struggle to extend their branch networks into Charlotte, N.C.-based Wachovia's territory.

U.S. banking is beginning to resemble a barbell, with only the extremes of big and small banks, notes Tom Kelly, a spokesman for New York-based JPMorgan Chase ($1.6 trillion in assets), the new owner of Washington Mutual (Seattle; $327 billion in assets). Speaking before Wells Fargo won Wachovia ($1.4 trillion in combined assets), Kelly told BS&T, "If you look at Citi and Wachovia, us and WaMu, and Bank of America and Merrill [$2.5 trillion in combined assets], there's going to be three companies with 4,500 to 6,000 branches each, Wells with more than 3,000, then those with 2,000 or fewer."

Those institutions are among the nine top banks in which the U.S. government will take an ownership stake in return for funding; the others are The Bank of New York Mellon ($205 billion in assets), State Street ($154.4 billion in assets), Goldman Sachs ($1.08 trillion in assets) and Morgan Stanley ($722 billion in assets). All but Bank of New York Mellon and State Street are also on the list of top 10 financial market players in the U.S. that collectively lost $460 billion, or 54 percent of their market capitalization, between Jan. 1 and Oct. 10 of this year, says Larry Tabb, CEO of Westborough, Mass.-based research and consulting firm TABB Group. Such global behemoths were the most likely investors in failed complex investments and so are the worst-hit by the crisis.

Now retail banking, which was in the shadow of the high-stakes wholesale side, is being reappraised. Many in the U.S., including Tabb, read the decision by Wall Street's last remaining investment banks, Goldman Sachs and Morgan Stanley, to switch to commercial bank charters as "absolutely" a play for funding in its easiest form: consumer deposits.

"It's funny," says former banker turned Aite Group (Boston) analyst Alois Pirker. "When I was at UBS, there was no interest in retail. Now it's saving them." (UBS, the biggest loser on Tabb's list, lost $87 billion from its stock value through October.)

Frankfurt-based Deutsche Bank (US$3.1 trillion in assets) announced in mid-October a big push into retail banking. It did not respond to BS&T's queries as to whether the goal is to boost liquidity and what its technology plans are for its 400 new European branches. Deutsche also announced it would cut 1,100 back-office jobs.

Rebirth of Community Banking?

At the other end of the banking barbell are ascendant community banks. Aside from the likely battering of their stocks (if they are public), many are reporting solid financials because they didn't dabble in subprime mortgages or their derivatives.

Community bankers tell BS&T that they are benefitting from the compromised position of the big banks. As consumers run to a perceived safe haven, Brent Rickels, SVP of First National Bank of Bosque County, says, "We've been growing steadily because of the influx of cash." In the past two months Rickel's bank has added a significant $2 million in deposits, growing its asset base to $97 million. He says the money is mostly from consumers who pulled out of investment banks and large banks.

Similarly, Joe Nicotera, SVP of Mercantile Bank & Trust Co., a Boston-based community bank with $139 million in assets, says his institution has gained $4 million in deposits over the past 18 months and expects to win substantially more using remote deposit capture. (For more on Mercantile Bank's RDC strategy, see page 41.) "This could become very big for us in the coming year as more businesses look for a smaller bank with all that is going on in the banking world," he says.

Separately, Boca Raton, Fla.-based Sun American Bank ($649 million in assets) aimed to capitalize on depositors' concerns by introducing in October a scheme to distribute consumers' deposits with Sun American across multiple institutions to overcome the newly raised FDIC limit and insure deposits greater than the new $250,000 ceiling.

More Changes to Come

Another backdrop to bank/technology prospects is new global competitors that, unsullied by subprime loans, may be on the march. For example, Madrid-based Banco Santander (US$1.2 trillion in assets), which owns part of subprime-weakened Sovereign Bank ($85 billion in assets), avoided helping inflate one of Europe's biggest housing bubbles ever and agreed in October to buy the rest of the Wyomissing, Pa.-based bank.

The other big environmental change in banking is possible new, international regulation to ensure that a similar domino effect can't take down the world's banks again. For instance, British Prime Minister Gordon Brown -- who has referred to the subprime crisis as "this problem that has come from America" -- urged at an Oct. 15 E.U. meeting that the International Monetary Fund should act as a global financial regulator with jurisdiction over national financial regulators in the U.S. and elsewhere. This increase in regulation obviously could create a rash of compliance-related technology changes.