FDIC Scrutiny to Lengthen Recession
Even healthy banks are being swept up into the regulatory crackdown.
By Renuka Rayasam, Associate Editor, The Kiplinger Letter
July 17, 2009
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Banks are starting to chafe on a federal regulatory leash that is getting even shorter. As the Federal Deposit Insurance Corporation (FDIC) takes a less sanguine view of lending previously seen as safe, even healthy banks are being ordered by their primary regulator to slash credit and raise reserves.
Regulators were too lenient for far too long, argues Gary Findley, a California banking attorney who heads The Findley Group, a banking consultancy. “I think the regulators are saying, ‘I’m going to show you,’ ” says Findley. “Now, the spigot is wide open.”
For example, federal watchdogs are no longer turning a blind eye to brokered deposits, in which out of state brokers delivered bulk deposits to a bank in exchange for higher than usual interest rate returns. These deposits were moved quickly in and out of banks in many instances and have been blamed for bank failures, such as in Georgia.
It’s “a business practice that gives regulators some concern,” says Kathleen Khirallah, lead retail banking analyst at the TowerGroup research firm. These days, even working capital loans are considered riskier. The same goes for land development and commercial real estate loans, which are being threatened by eroding property values.
Few institutions successfully contest bank regulatory orders with administrative appeals or lawsuits. The regulators are generally presumed to be in the right. “It’s very hard to defeat your regulator in court,” says Jaret Seiberg, a senior vice president covering financial services policy for the Washington Research Group consulting firm.
The upshot will be a further restriction of credit for businesses, which will be one more reason that the economy’s climb back from the recession will take longer than usual. “We don’t think this is healthy for the industry,” says Findley. “If we have a vast majority of banking under regulatory scrutiny, lending is going to pull back.”
The FDIC is trying to give banks some help. Look for Uncle Sam to make higher deposit insurance ceilings permanent when the temporary hike from $100,000 to $250,000 per depositor ends in 2013.
And it will also extend temporary insurance on non-interest-bearing deposits, while increasing the fees charged for it. Banks now pay $1 per $1,000 on deposits of more than $250,000. Given the continuing worries about bank failures, there are good odds that the FDIC won’t let the program die on Dec. 31, but will extend it by six months.
But the FDIC will up the fee to $2.50 per $1,000. “The biggest demand for this program will be in areas where there have been a lot of bank failures,” says Chris Cole, regulatory counsel at the Independent Community Bankers of America. “That is where customers are more concerned about stability.”
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Reader Comments (3)
Posted by: Nomen at 07/17/2009 10:11:50 AM
It's about time the banks got clamped down on. It won't lengthen the recession (bank scare tactic) and it may save us from further instability. For years there were only three small banks in my town and in the last 10 years that number has increased to eight including branch banks with an ATM machine every few blocks. Branch banking has become a totally reckless effort at expansion. Now that each small bank has the additional overhead of several additional locations,they keep coming up with more fees and pay less interest to cover the lack of new customers. Add this to the shaky loans they have been making and it appears they are ALL overdue for some serious scrutiny.
Posted by: ChrisCD at 07/17/2009 04:09:58 PM
First, quit making brokers the scapegoat for banks bad loan and investment decisions. Secondly, how much more work does it take to handle a $1000 deposit from an individual that requires full Patriot Act CIP vs. $1,000,000 from a bank that is CIP exempt. The rate may be higher, but the cost to the bank when all things are factored is less. Third, brokered deposits are often times at a lower rate. They certainly are now. A bank can bring in brokered 1-year money at around 1.35%. This compares to national rates available on the internet at around 2.00%. Finally, brokered deposits should be placed in the same category as rate service, internet, and non-local deposits. None of the above are core deposits, none of them should be treated as such. Yet, a bank can pull in Millions of dollars from the internet or a rate service, and no one ever blinks.
Posted by: Joe Honick at 07/22/2009 05:24:42 PM
The preceding comments are quite accurate, but what is also lengthening the recession is the failure to implement any job creating public works proposals as promised by President-elect Obama on December 8, 2008. What the public sees is a trillion dollars tossed to big business and finance while the job problem somehow got overlooked until recently jsut ahead of Congress looking for a summer vacation. On top of all that is the seeming main theme for the so called 'loyal opposition' to spend more time finding how to bring Obama down instead of trying to hammer out positive and constructive proposals on anything at all. Result: lethal to public confidence.