Friday, November 04, 2011

Move Your Money -- if convenient and profitable

In honor of Bank Transfer Day, a redux of this 1/7/10  post, with updates, seems to be in order:
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 [UPDATE - neither of the two tools now offered show financial ratings, though one only shows institutions ranked "B" or better by the provider, IRA Bank Ratings.  For ratings on an A-E scale provided by Weiss Ratings, see this at Weiss's methodology is here. Disclosure: I have done media outreach work for Weiss.]

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 lain 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.
    UPDATE:  In 10/31/11 testimony before the House Subcommittee on Financial Institutions and Consumer Credit, a certain Marty Reinhart of the Heritage Bank in Spencer, WI, speaking for the Community Bankers of Wisconsin, complained about a new regime of tighter mortgage regulation, restrictions on "creative" loan types, reduced leverage ratios and increased capital ratios. He then offered an eloquent lament for  apparently lost regulatory capture, i.e. reduced coziness between regulators and regulatees:
    Before the crisis, examiners frequently worked in partnership with the banks they examined. They were a resource in interpreting often ambiguous guidance. Where corrections were needed, opportunity was given to make them, and compliance was a mutual goal. This is the best means of achieving safety and soundness without interfering with the business of lending. I understand examiners are not evaluated on the banks’ contributions to support the local economy. They have become overly cautious in their analysis of the bank’s condition and as a result, the examiner’s incentive is to err on the side of writing down loans and demanding additional capital. The current crisis was not caused by a failure to adequately examine community banks.
  • Community banks are failing in droves [albeit at a reduced pace in 2011]. Over 140 banks failed in the U.S. in 2009 [UPDATE: and 157 in 2010, slowing to 75 in the first three quarters of 2011]. Since February 2007, banks with assets totaling $547 billion  [update: $678.4 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 [UPDATE: my son just opened an account with a credit union that has arrangements with McDonald's and another retailer allowing depositors to use the retailers' ATMs for free. Perhaps more such deals will offset big banks' advantage on this front.]

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 a megabank because it has ATMs all over our area. We have a second checking account with a now-multinational bank  because we were required to open one to get a low home equity loan rate. Neither of these accounts have any fees [UPDATE: the second one now requires a minimum balance; though the loan is paid off, I keep it as a backup.] We keep them both starved of funds, though, keeping excess cash on hand in two internet savings accounts that offer high interest rates, electronically linked for free transfer to and from the megabank account. [UPDATE: there's no such thing as a 'high' interest rate any more -- is .7% worth the trouble? That's why I haven't bothered to close the second checking account.] 

Move your money where it pays you to keep it.

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