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Want to Make a Banker's Day? Yank Your Deposits

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There is bad news for those who withdrew funds on Bank Transfer Day to punish the targets of their ire.

Most banks don't really need their money — at least not right now.

The brutal truth is that the banking industry has more deposits than it can realistically handle. Good loan opportunities are hard to come by, investing in long-term bonds and munis remains a risky proposition, and many bankers are intimidated about testing the waters by buying corporate notes.

I have been to several conferences in recent weeks attended by chief executives of banks. Though most are still adamant that they want the customer relationship, you discover with very little prodding that bankers have their hands full putting deposits to work. The Federal Reserve certainly hasn't helped, vowing in August to keep the fed funds rate near zero until 2013.

"We're going to have this cash for two more years. What are we going to do with it?" Craig Meader, the chairman and CEO of First National Bank of Kansas in Waverly, said at the American Bankers Association's annual meeting in San Antonio. He made the comment after bemoaning the absence of good investments during a panel discussion on the future of banking.

"The industry certainly doesn't need more deposits today," Fred Cannon, the chief equity strategist at KBW Inc.'s Keefe, Bruyette & Woods, declared at an American Banker analyst roundtable last week. "The Fed made sure of that. The industry is awash in liquidity, which has turned into a problem for many banks across the country."

Many bankers are doing what they can to discourage big inflows of deposits. Bank Transfer Day notwithstanding, many feel like Mickey Mouse in the Sorcerer's Apprentice scene in Fantasia; the brooms keep dumping water into the tower as Mickey futilely attempts to toss water out the window.

"We keep driving down the rates on our deposits, but every time we do that it seems like more deposits come in," Michael Bauer, the chief credit officer at Community Bank Shares in New Albany, Ind., said in an interview Tuesday. The notion of hot money — when a customer leaves a bank after finding a higher rate elsewhere — seems to have gone away, too. "It has gotten to the point that customers don't even shop around for rates anymore," Bauer said.

"We've had to suppress deposit growth a little bit," added Mark Long, the president and CEO at First Commercial Bank in Sequin, Texas. His bank is facing stiff competition from bigger banks when it comes to courting and keeping its best borrowers, he said in an interview Tuesday.

While small banks don't necessarily want or need deposits, consumers seem more eager than ever to move their money to smaller banks. Based on recent data from the Independent Community Bankers of America, the group's "community bank locator" website drew nearly 11,000 hits from Oct. 8 to Nov. 8. (A year earlier, the site drew less than 400 hits.)

It would seem at first glance that banks would be sitting pretty in a low-rate environment, particularly when interest on deposit accounts hovers at historical lows. But holding onto these largely idle deposits is costing banks more than you might think.

Dan Geller, an executive vice president at Market Rates Insight in San Anselmo, Calif., estimates that federal deposit insurance is costing banks $1 for every $1,000 in deposits they hold. Banks are also incurring at least $200 in annual overhead costs for each checking account, regardless of whether a balance is $100 or $10,000, he said.

And those costs exclude any interest payment to the customer. The current average interest rate on deposits is 0.57%, which banks have to pay regardless of their need for liquidity, Geller said. At Oct. 31, the excess liquidity deposited at the Fed by banks amounts to $1.5 trillion, earning a rate of 0.25%, Geller said.

Marty Hansen, the president of First State Bank in Fairfax, Okla., concurred, noting that his bank is enduring a 52% loan-to-deposit ratio right now. That's right. His bank has twice as many deposits as it does loans.

Nationwide, that ratio was 73% at midyear, according to the FDIC's quarterly banking report. That translates into roughly $8.86 in deposits for every $6.37 in loans on banks' balance sheets. Those funds have to go somewhere if a bank wants to make any money.

When the financial crisis hit, Congress let banks park money at the Federal Reserve for a paltry 25-basis-point return. Banks have made generous use of this option, which still exists; 72% of all deposit inflows from January to June were moved to the Fed, according to the FDIC.

Some bankers are getting resourceful. Bradley Koehn, southern regional president at Midwest Bank in Lincoln, Neb., told me the agricultural bank was using some of its short-term deposits to secure longer-term certificates of deposit at other banks.

"We stay within the FDIC insurance limits," Koehn said, given the potential for bank failures. I asked what they would do it the bank needed its cash back, given penalties for early withdrawal. "The penalties are so low right now," he said.

To be sure, deposits will eventually regain value as loan demand picks back up. And there are some bankers who still believe that they can use deposit accounts to market other services, particularly on the commercial side.

"I think community bankers also know that over time the biggest value added they have is going to be sticky deposit relationships," Cannon said. "We're in this kind of Catch-22 period of deposits in banking in the U.S. where you don't want more of them, but you do want those relationships over time."

John Stumpf, the chairman and chief executive of Wells Fargo & Co., recently defended his bank's efforts to keep bringing in deposits. "If you were short term in your thinking you could make that argument" that Wells is taking in too many deposits, he said at an Atlanta Press Club meeting last month.

Stumpf makes sense. It would be great to have all these deposits — in another year or two, some bankers say. And it makes sense to take them in now if a bank is strong enough in terms of fee revenue and capital position to absorb hits to the net interest margin.

"We're growing households, and we want to get positioned for growth," said David Freeman, the president of QNB Corp., told me during a quick conversation at the ABA's annual conference. Still, he acknowledged that loan growth continues to be a challenge for the Quakertown, Pa., company.

"There's still an overall lack of confidence," Freeman said. "We've got great deposit growth, but there's not a lot we can do with it."

So bankers shouldn't fret when the Credit Union National Association releases data declaring that credit unions added 40,000 members and $80 million in deposits on Saturday. That averages out to $2,000 per account and $8 million in annual overhead costs that the banks are no longer tasked with incurring.

This might sound brutal or harsh, but by closing a savings account, the switchers might have done a favor for the bankers that have been drowning in your cash, at least in the short run.

The overall lesson? If consumers really want to punish the banks and hurt them financially … they should consider bringing that cash back and opening a CD.

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Comments (8)
LOL! Yeah, 690,000 people moved about $5 billion from the Wall Street treasonous banks and in to local community Credit Unions and that helped the criminal traitors. Sure it did. LOL.

Well, count on thousands more Americans "helping" these right wing treasonous banks daily from now on.
Posted by Fred N | Wednesday, November 09 2011 at 7:28PM ET
I guess banks won't miss the loans and credit cards that moved as well. What a relief. I was beside myself with worry. Good news, based on satisfaction rates with credit unions and community banks, these burdens won't be back.
Posted by Winter P | Thursday, November 10 2011 at 6:53AM ET
The Bank's have no reason to take deposits. It costs much more money to deal with customers and handle the accounting for thousands than to go to the Fed window and borrow more for less. One transaction - no statements to depositors, no postage, no customer complaints. It is a true subsidy, and one that is on-going.

Missing from the article is the argument that banks should be making loans, not acting as a brokerage for its own account. Instead, with money so cheap, they can just look for safe investments where they can earn whatever the spread is to cover operating costs and give the shareholders a dividend.

At some point, either the economy will collapse or recover. If is collapses the discussion is moot. If it recovers, then there will e a scramble to get the 15% credit card customer, and to make the 6% new car and 13% used car loan. Oh, and the adjustable mortgages so the hedge funds can securitize and sell them as bonds (while betting against them).

The movement of funds out of the BofA, JPM, Wells, Citi, etc will boost earning in the short-term. When and if things move back to the old normal, each of these institutions will have one business left - Investment Banking which is what they want anyway. Deposits were only the means to get the money to "invest" and trade for the institutions own account.

One way to change the dynamic - bring back Glass-Steagall. Suddenly, depositors will be important again. Until then, the banks will have a holiday. Well, maybe only until Dodd-Frank takes hold, if ever, and if true banking reform is passed by Congress. But wait - there goes another little flying piggy!

Richard Isacoff
rii@isacofflaw.com
Posted by richard i | Thursday, November 10 2011 at 9:18AM ET
It's amazing that the "Peasants with pitchforks" attitude continues with the financial sector's executives -- the idea that the average consumer is irrelevant and more trouble than they are worth. As WinterP noted, it isn't just the deposits that disappear, but the customer as well. Convenience has its place, but the fact of the matter is the peasants do have many options. When all is said and done, the peasants will establish that they are essential and conveniences abound.
Posted by RSE Journal | Thursday, November 10 2011 at 9:43AM ET
With the way they treat their customers, don't expect that money to stay with them very long. Service stinks when it comes to the big banks and their arrogant, cocky behavior will help people make up their minds as to where they want to go with their money. Of course they don't mind losing deposits today as they have the vision of a blind man and their long term reach doesn't go further than tomorrow, so when things change, it's going to cost them dearly to bring back those customers.
Posted by mauriciott | Thursday, November 10 2011 at 9:47AM ET
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