R.I.P. FDIC

I don’t mean to go all Eddie Chiles on you, GonzoBankers, but I’m going to have to tiptoe outside of my normally peachy disposition and get a little dark and angry this week. You’ll understand. Consider a few articles I’ve read over the past few months.

• Less FDIC Coverage Means Less Regulation. Kristy Welsh, in her Dec. 23, 2009, blog and in the follow-up on Jan. 5, 2010, writes that both Chase and Citibank recently whispered on their Websites of their decisions to drop participation in the FDIC’s Transaction Account Guarantee Program (TAGP). The TAGP insures certain funds deposited by a customer over the standard $250,000 coverage limit.Welsh points out that this could well be a calculated move by the banks to free themselves of certain Bank Holding Company Act investment restrictions that only apply to banks that participate in the TAGP.

Hmmmm … Less FDIC Insurance = Less Regulation. Kinda makes sense to me.

• A Stab at Leaving the NCUSIF. Claudia Grisales of the Austin American-Statesman on Feb. 10, 2010, covered the effort by Velocity Credit Union to drop the National Credit Union Share Insurance Fund, the credit union equivalent of the FDIC’s Bank Insurance Fund, in favor of private deposit insurer American Share Insurance Corp. This effort apparently began because the credit union was puckered over the NCUA’s fee assessment for all credit unions to cover losses at the bad apples. The effort reportedly passed a general credit union vote but was later abandoned when ASI announced that it, too, would assess its members a special fee to cover industry losses, thus befouling a key element of its attractiveness to Velocity.

Addressing the credit union’s membership reaction to the proposed move to ASI, Velocity President and CEO Debbie Mitchell said: “They trusted us to do the right thing. Some people were opposed; other people wanted to know the history … There were very few phone calls … not a lot of member reaction.” (Emphasis added, and rightly so.)

• Frowny-Faced Sheila Bair. AP business writer Marcy Gordon pointed out in her March 1, 2010, article that FDIC chief Sheila Bair, in throwing her support to yet another proposed consumer protection agency, actually admitted that “I don’t think we’ve done a good job in protecting consumers in financial services.” No crap? For once I’ll agree with Frowny Sheila – not just on the consumer compliance front but in protecting consumers from having, in effect, to pay for the FDIC’s inability to assess or manage risk. The October bill alone for this shortfall was a $45 billion motherlode. “Haven’t done a good job …” Understated but accurate. No one, and I mean NO ONE, trusts this agency anymore.

In true Gibsonesque style, my analysis of the data tells me one thing: 

We must rid our industry of the Bank Insurance Fund and the FDIC, a punitive, dawdling embodiment of bureaucratic incompetence that has hamstrung, not protected, our industry.

It can’t happen over night and won’t happen even in a few years, but the FDIC must go for our industry to realize its full potential. The very protection that the FDIC provides us is the crutch that will trip us. I’m certainly not the first one to propose this, but I don’t hear much about it anymore. The time has come to review our options.

CATO’s Call

Consider the June 1985 paper by CATO Institute’s Catherine England – Private Deposit Insurance: Stabilizing The Banking System (CATO Policy Analysis No. 54).  England brings up some insightful points. The time traveling first sentences in her article are these: “Banking regulation is at a crossroads unlike any since the 1930s. Fundamental decisions are being made that will shape the future of the financial services industry. At the heart of the issue is the role the federal government should play in the banking industry of the future. 

Yikes, Chachi, and that ’80s crisis was a boil on butt of the mess we’re slogging through right now. Some things that fit in 1985 still fit 25 years later. (Of course, not EVERYTHING from 1985 still fits!)

In true Less-is-More CATO fashion, England’s policy (with some Gonzo editorializing thrown in) says that the government/FDIC is may be the worst entity conceivable to insure/protect consumers’ deposits:

• The government is far too politically motivated and slow-moving to possibly keep up with the pace of change in the financial services industry. New technology and products emerge quickly, and these products all have unique and sometimes completely deal-changing risk profiles. FDIC is a lot of things, but nimble it ain’t.
• The very protection that the FDIC provides is a crutch to innovation because the regulations that come with that protection prevent banks from being truly innovative or entrepreneurial.
• The market is a far better hammer to enforce safe and sound practices than a brown tie-wearing regulatory agency that gets paid whether the bank protects its depositors or not.
• Private insurers would likely be more successful in regulating bank safety and soundness as they are faster moving, able to dedicate adequate resources (quantity and quality), and are not politically driven. They could play favorites, use subjective analysis, and really assess and penalize or reward (via insurance rates) the most important differentiator across banks right now – management strength.

An Educated Public = A Healthier Banking System

Today, the public is not incented to truly learn about banks and how they operate because they have that FDIC insurance, which protects most deposits no matter what the banks do. We have effectively taken the market discipline out of the hands of the market and placed it in the pudgy pink hands of the government. With that guarantee gone, we as consumers would have to do some homework on the banks we patronize, like we do with Morningstar before we invest in a mutual fund. In turn, banks would have to perform up to OUR standards, or WE’LL enforce market propriety with our wallets and with our legs. 

I don’t think the CATO Institute went far enough, though. In the ultimate end of the FDIC, banks would operate in an outside-regulation-free environment, with self-regulation taking on utmost importance, and the mighty market will be the prowling Igor, the shotgun-toting enforcer.

Ahem. Clearly, there are legal and practical hurdles to clear – lots of them – between now and then.

GonzoBankers in the Driver’s Seat

That said, the time to start moving that way is here. The value of FDIC insurance right now is as overstated as it has ever been; the FDIC value proposition simply does not work when the public doesn’t trust the government. Family-owned and true community-based mid-size banks are the most poised to begin the movement away from the FDIC. I see the rock solid, heart-level relationships my clients are able to forge with their local communities – consumers and businesses alike. These banks and credit unions are an integral thread in the drawstring holding up their communities’ drawers. They, unlike their big bank counterparts and the government, are trusted. (Check out “The Least Trusted Banks in America,” The New York Times, Feb. 9, 2010)

Once again I bring my Fair Readers back to Trust and how it, not regulation or insurance protection, drives the financial industry’s success and failure. GonzoBankers, think how quickly you could try new ideas, establish products and services to cater to a niche, and act in a truly entrepreneurial fashion if you didn’t have The Man breathing down your neck.  

Now is the time to start moving in that direction. We – smaller banks, mid-size banks and the public – are bailing out the big banks while they continue to plump up on fat bonuses. And why don’t they get penalized by the market? Because the public does not give a rat’s about fat-cat bonuses as long as their funds are protected. We care enough to whine, but we don’t care enough to leave the big banks in the dust.

But without the FDIC insurance, the public would over time assert itself and do business only with banks they trust. Community and mid-size bankers – GonzoBankers! – the industry would be yours for the taking. All you would have to do in the long run is to ensure that the market – your customers – trusts you more than it trusts the government. And, uh, that’s not exactly setting the hurdle to stratospheric levels. Look at this:

Source: CBS News

Status Quo Revisited

GonzoFreaks, keeping the public’s trust would mean having rigorous self-discipline and the ability to move as fast as the market will demand. It would mean making loans to people no matter what neighborhood they live in. It would mean making loans with fair rates and terms to minorities and women. It would mean knowing customers better than anyone else does. It would mean protecting customers’ privacy with a vengeance. It would mean not charging predatory fees. Come to think of it – community and mid-sized banks would have to do nothing more than they’re doing already!!

To succeed in this utopian pipe dream, our industry – WE – would have to be able to put our entrepreneurial money where our anti-regulation mouths are. It’s a big, fat, 10-year goal, not a tactical goal for 2011. Between FDIC-free banking and right now, there will probably be some level of variable-price/variable-regulation, some mix of government and private insurance, pure private insurance, etc.

I tremble to think that in a single article I have agreed with the CATO Institute, Citibank and Chase. I swear I’m not abandoning my liberal roots, saying the market should rule all, or trying to shut down the government. But, damn, when faced with the brash ineptitude of the FDIC, Bair’s Band of Brain-dead Bureaucrats, and the toll they are taking on our industry, we cannot with good conscience try to just tweak and fine tune. We need something with a more wholesale nature at this point.

Done over time, 86-ing the FDIC would not cause a run on deposits or even let banks run roughshod over the public. Community and mid-size bank customers already trust their financial institutions more than they trust the government. These banks are already doing what they would need to do to retain that trust in the absence of a deceptive insurance policy. That’s half the battle. It’s possible.

“A dream it’s true
But I’d see it through
If I could be
Wasting my time with you”
–“Waste” by Phish 

-smh

 

MAINTAIN ‘TRUSTED ADVISOR’ STATUS

Once you have earned your customers’ trust, how do you stay top of mind with them as their financial institution of choice?

Cornerstone Advisors works with you to develop and execute a strategic plan that positions you for a competitive future.

Our unique, phased methodology helps your institution create a strong, actionable strategic plan aimed at a profitable, predictable future.

Visit our Web site or contact us today to get started.