Regulators have quashed a bold plan by Sovereign Bancorp. to drain deposits from the high-cost Savings Association Insurance Fund.
The $8 billion-asset thrift, based in Wyomissing, Pa., had sought to systematically shift its customers' deposits into an affiliate backed by the Bank Insurance Fund. But regulators deemed the ploy a violation of the conditions placed on Sovereign's acquisition of the affiliate.
The episode, which illustrates how far some thrifts are trying to go to avoid the high insurance premiums of the thrift fund, got under way when Sovereign distributed a flier offering customers bank-fund insurance. The flier said that transactions made on or after April 8 would automatically cause accounts to be switched to the affiliated bank, Colonial State Bank, Freehold, N.J.
"We're very proud to now offer you BIF coverage," the flier reads. "You can obtain Bank Insurance Fund coverage on your savings accounts simply by making an account transaction such as a deposit, withdrawal, update of your passbook, MAC transaction, pre-authorized payment, direct deposit, or point of sale transactions.
"Any of these activities will automatically obtain BIF coverage for you account(s). ... It's that easy."
But the plan proved short-lived. Sovereign's customer base includes employees of the Federal Deposit Insurance Corp., and when regulators saw the fliers, Sovereign officials were reminded of a condition on the acquisition of Colonial.
The FDIC approval order, dated Oct. 30, reads: "Colonial State Bank, or its successors, will not engage in any activity, due to a deposit insurance rate differential, that would encourage, invite, promote, or otherwise serve to cause the migration of deposit funds that would adversely affect either the Bank Insurance Fund or the Savings Association Insurance Fund."
Without the strict language prohibiting the movement of deposits, the FDIC would not have approved Sovereign's purchase of Colonial, now called Sovereign Community Bank.
On Jan. 1 the bank fund stopped charging insurance premiums, but the thrift fund continues to levy a 23-cent fee on every $100 of domestic deposits.
Pressure on regulators and thrifts grew last week as Congress refused to tack legislation rescuing the savings association fund to a broader budget bill.
Jay S. Sidhu, Sovereign's president and chief executive, said the thrift is now looking for new ways to move deposits. Sovereign is losing up to $40 million a month in certificates of deposit that move to banks offering better rates, he said.
"Customers are looking for better returns," he said. "We just can't afford to see an exodus of deposits out of our institution into institutions that pay nothing for deposit insurance."
