Rodney Johnson | Monday, January 7, 2013 >>
We need a banking revolution… or at least a saver’s revolution.
The latest twist in the saga of the bank bailouts is almost too much to bear. Just when you thought large banks might be brought to heel, or at least stopped from inflicting more harm, we get the end of TAG (Transaction Account Guarantee).
While I am not a fan of this bailout program (or any other, really), the ramifications of ending it now will be disastrous for small banks.
In the depths of the financial crisis everyone was worried about their money. Was it safe in banks that seemed so shaky?
FDIC insurance guaranteed smaller deposits (less than $100,000 at first and then less than $250,000 later), but what about larger numbers? What about company deposits that had to be in the millions to meet payroll needs and pay suppliers?
Depositors of this size were nervous and in danger of jumping ship…
They could take their money out of the banks and simply buy very short-dated U.S. government debt (one- to six-month maturities). Or they could move their money around to many different banks, an idea the Fed didn’t like.
If the deposits left the banks altogether, then the banks would have smaller capital bases, which would force them to sell off loans or other assets to keep their capital ratios (deposits-to-loans) in balance. This would have created even more pressure on banks.
So the government implemented an unlimited guarantee on non-interest bearing transaction accounts, which became TAG.
Now, with the crisis abated for the moment, the government is allowing TAG to expire. But here’s the problem…
The underlying issues the banks face have not gone away. They still hold billions, if not trillions, in bad assets. They own homes they acquired through foreclosure. They have delinquent home loans on their books, and then there are all those pesky Home Equity Lines of Credit (HELOCs) that no one’s discussing.
To top it off, banks are not required to mark their assets to the market price. That means they can say they have trillions in assets when the reality is they have nothing close to that. So no one really knows what will happen when the next shock to the system occurs.
Hmmm. Scratch that last part. There is something that we know. Government will rescue the largest and most broken banks… again.
So what is the natural outcome of the end of TAG?
Large depositors will move their funds to the banks most likely to be rescued – those behemoth banks that are the crux of our broken system today – leaving those smaller, more prudently run banks to run dry.
As this shift occurs, expect the stock prices of small and regional banks to come under pressure, while the giants in the system enjoy gains that, oddly, they created through their own failures.
Surely we can create a better system than this. We think it’s time savers revolt!
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