Friday, October 28, 2011

This Week in Bank Failures

Bank Transfer Day is a boycott movement protesting some of the fees at the giant banks, designating November 5 as a day for customers to move deposits to local credit unions. What started out as a Facebook post has grown into a nationwide movement with an estimated 500,000 people participating.

The loss of 500,000 customers would be a major blow to almost any business, but the giant banks will barely notice the decline in deposits, and that not until they check their balance sheets in January. For the benefit of those who might worry, the movement of deposits is not like a run on the banks and won’t create unusual cash management challenges. Banks face larger cash management exercises every Thursday and Friday as payroll direct deposits go out.

Bank Transfer Day is not the only consumer movement affecting the banks. It is supported somewhat by Occupy Wall Street, and all year, Move Your Money has been agitating for local banking. At the same time, consumers are moving on their own after being startled by new banking fees. When Move Your Money first launched, banking industry observers said they would be surprised if the giant banks lost more than 2 or 3 million customers. But that was before the latest round of new fees, and looking at it now, the eventual movement of customers will be an order of magnitude larger than that.

The winners in this movement are, first of all, the banking customers who will save a fortune in fees, but also the credit unions and local community banks. Some credit unions reported almost a year’s worth of new deposit customers in the month of September, and October and November could be larger. With the additional deposits, the rate of small bank failures, already low, will become that much lower. The FDIC also benefits, and not just by avoiding a few small bank failures. When the next major bank failure hits, the Deposit Insurance Fund will be on the hook for a smaller amount of insured deposits.

There is a bigger issue at stake than banking fees themselves. Banks ultimately need to charge for the services they provide, but the cost structure of the giant banks is 2 to 5 times that of almost all other banks. Cost, rather than greed, is the reason the giant banks feel justified in charging $8 for a service that might cost $2 at a normal bank. But the costs put the giant banks at a competitive disadvantage in a time when the trend is for banks to charge transaction fees to cover the costs of services. The giant banks cannot survive in their current form; they must find ways to cut their operating costs.

Bank of America, which inspired much of this fuss with its announcement of a $5 per month activity fee for debit cards, now says it will provide customers with more ways to avoid the monthly fee. For example, active credit card users might not be charged for using their debit cards. But the bank has not settled on anything specific yet. In the meantime, the new fees are already taking a bite out of the card business. Visa reported soft transaction volumes, indicating that consumers, uncertain about what fees they will be charged, are holding back on debit card transaction even in situations where no usage fees are actually in effect.

One very small bank failed tonight, though its name might make it sound more important than it is. The bank was All American Bank, in Des Plaines, Illinois, with $33 million in deposits. International Bank of Chicago is purchasing the assets and taking over the deposits.

The NCUA took over a credit union yesterday. Birmingham (Alabama) Financial Federal Credit Union, with 400 members, was put into conservatorship and its office closed. Members can access their accounts at the nearby office of America’s First FCU. In conservatorship, the NCUA will hope to improve the fortunes of the credit union. In this case, not having to pay the expenses of operating its own location might help the credit union’s financial picture.