The FDIC is taking steps to encourage consumers to keep their money in the bank, emphasizing that in the case of a bank failure, the FDIC is legally obligated to pay insured deposits “as soon as possible.” This point is significant to anyone worrying about inflation and the limited size of the FDIC’s line of credit with the Treasury. The FDIC’s argument to consumers emphasizes the idea of keeping their money safe, but the only thing that will really persuade consumers to keep more money in the bank will be higher interest rates, and that will not be happening for the next five years, if you can believe the statements coming out of the Fed.
Developments this week: Treasury Secretary Tim Geithner urged Congress to hurry with financial system regulatory reform, hinting at the risk that a new Wall Street breakdown could derail any economic recovery. ◾ Congress is considering a measure to change the FDIC’s assessment base from a bank’s deposits to its assets. The rationale is that it is usually a problem with a bank’s assets, rather than its deposits, that leads to a bank failure. A problem with this approach, though, is that it discourages banks from keeping extra assets. This might be resolved by exempting the safest assets, such as cash. ◾ Calls to dismantle the FDIC and eliminate deposit insurance continue to come from financial analysts who have failed to learn the lessons of history. It is worth noting that none of the people who are calling for an end to deposit insurance appear to have any substantive understanding of economics. ◾ A week ago, the NCUA closed Ensign Federal Credit Union, based in Henderson, Nevada, with 7,900 members and $98 million in assets. Member accounts were moved to EDS Credit Union. ◾ Residential real estate values will continue to fall, with construction down just 30 percent from the bubble levels of last year, mortgage delinquencies at the highest rate ever seen, and Congress’s recent extension and expansion of the home buyer tax credit. All this puts more pressure on bank balance sheets, as about half of bank assets are based on real estate.
There was one small bank failure tonight: Commerce Bank of Southwest Florida, with one office in Fort Myers. The formerly high-flying banking culture of southwest Florida has been hit with the second-largest concentration of bank failures in the country, behind only suburban Atlanta. The failed bank had $77 million in deposits. The cost for this bank closing is estimated at $24 million. Deposits and assets were purchased by Central Bank, a Minnesota bank that has been acquiring failed banks at a rate of one per month.