Thursday, January 07, 2010

"Move your Money" -- if convenient and profitable

There is some merit in Arianna Huffington's Move Your Money campaign to induce individuals to transfer their funds from the megabanks so many of us use to local community banks. The plan is greatly strengthened by providing an online tool by which we can all check the financial strength of local community banks.

Like most Arianna productions, though, this one is an oversimplified morality play: big bank bad/small bank good. It's telling that one of her co-sponsors is a filmmaker and that she's openly inviting all of us to enact a real-life rerun of "It's a Wonderful Life." A few caveats:
  • I thought we'd all got over "It's a Wonderful Life" rapture in the wake of the savings and loan crisis of the late eighties/early nineties, when over 700 S&Ls failed, costing U.S. taxpayers something like $150 billion. Thanks in part to deregulation in the early 80s that expanded S&Ls' lending authority and weakened accounting standards, many were subsequently run more by Potter principles than by George Bailey principles.  For that matter, consider the movie itself. But for the extreme virtue and fortitude of the hero, the angelic Building and Loan would have been absorbed by Potter's bank (which might have remained a community bank to this day, unless Potter proved more able than a handful of SuperPotters).

  • Community banks are not exactly politically unconnected Davids going up against the industry Goliaths. The industry's trade association, the Independent Community Bankers of America (ICBA) was very effective in weakening the  Consumer Financial Protection Agency created by legislation passed in the House.  The ICBA succeeded in exempting community banks from CFPA examination and in preventing the CFPA from mandating that community banks offer "plain vanilla" loan products. Thus crows an ICBA  press release dated Oct. 28, 2009:

    �Specifically, ICBA applauds the ICBA-backed Examination and Enforcement amendment that was included in the bill and thanks Reps. Brad Miller (D-N.C.) and Dennis Moore (D-Kan.) for introducing the amendment, which will provide relief from direct CFPA examination for all community banks with assets under $10 billion. In particular, the amendment keeps examinations, both compliance and safety and soundness, for banks with assets less than $10 billion with the banking agencies and bars the CFPA from assessing any fees against these banks for purposes of funding the agency.
    Finally, the bank regulator, instead of the CFPA, will have primary authority to enforce violations of consumer laws for community banks. �ICBA is also pleased that the CFPA bill eliminates the mandated �plain vanilla� product requirement and the vague �reasonableness� standard. ICBA also appreciates that Chairman Frank has called for an assessment on nonbanks rather than placing additional unnecessary burdens on common-sense community banks that did not engage in the deceptive practices targeted by the proposal. With that in mind, ICBA encourages lawmakers to tighten the scope of CFPA�s authority and provide joint rulemaking with prudential regulators.
  • Community banks are failing in droves. Over 140 banks failed in the U.S. in 2009. Since February 2007, banks with assets totalling $547 billion have failed, most of them with assets under $1 billion. Banks of all sizes are failing because they made bad loans and purchased now-toxic mortgage-backed securities. Just today, the WSJ reports about problems stemming from small-bank purchases of complex mortgage bonds from one ubiquitous broker: "Regulators are requiring many small banks to set aside extra capital because of an unusual mortgage-bond shopping spree that began as housing-market trouble was brewing...These small banks began barreling into [complex mortgage] bonds around mid-2007."  And guess what - community banks are resisting the extra capital requirements, claiming that they will curb lending.

  • Convenience matters. Most people are not going to park their checking accounts in banks where the nearest branch is 5-10 miles away and where's they can't get to a convenient ATM both at home and at work.  For most people, Arianna's  plan would entail keeping savings in the community bank and a checking account somewhere else.

Individuals can best protect their own interests and shape banking industry behavior by being smart consumers -- that is, doing business with banks that offer the highest interest on savings, the lowest interest on loans, the lowest and fewest fees on all accounts, and the best service. That probably means using two or more banks.

Personally, my wife and I have a checking account with Bank of America because it has ATMs all over our area. We have a second checking account with Sovereign Bank (now owned by the Spanish bank Santander) because we were required to open one to get a low home equity loan rate. Neither of these accounts have any fees. We keep them both starved of funds, though, keeping all excess cash on hand in two internet savings accounts that offer high interest rates (one of them linked to a credit card that deposits cash back into the account). (Years ago, I tried to keep some savings in B of A through CDs, but the arrangements were so clunky and the interest rates so crummy that I gave up.)

Move your money where it pays you to keep it.

1 comment:

  1. I thought I'd post a comment because I ran into one of the pitfalls of community banks a week before Arianna's campaign hit the web. I have my money in a community bank. Normally I have had no problems. But over the holiday week, I ran into a big one. I checked my account online and found out that on that very day, I had gone $3 in the red. Initially my wife offered to give me $5 to bail me out. (For those who are wondering, yes, this has happened before, and yes, a same-day deposit has saved me from penalties.)

    But the problem was that we were in a city that was far, far away from my community bank's nearest branches. Wiring money to my account would have cost almost exactly the same amount ($40) as the eventual penalty I got hit with ($37). So a community bank does have limits in those tough binds when you need to go to an actual bank.

    And here's another question I thought of when I read about Arianna's campaign: if enough people move their money to community banks, some of them will grow big enough that they will cease to be community banks.