Murray, KY – Community banks have been relatively isolated from the financial crisis which has plagued the larger banking system in the last few years. But those problems are having ripple effects throughout the entire system. Angela Hatton reports on how bank failures could significantly impact our small-scale banking systems and their clients.
Imagine the feeling you would get if your rent or mortgage payment more than tripled for a one-time fee.
"Well, it's just been sheer outrage, just to be honest with ya. I mean it was just we were kind of shocked to see those kind of numbers come across."
Murray Bank President and CEO Ronnie Gibson and thousands of other community bankers are facing a similar problem. These community bankers are upset because of a recent proposal by the Federal Deposit Insurance Corporation. At the end of February, the FDIC, the Federal Deposit Insurance Fund, announced they would increase the premiums leveraged from their member banks two points to an average 14 cents per hundred dollars of insured deposits. An increase was OK with bankers. Most had budgeted for it.
"What caught us out of left field is all of a sudden there's the twenty basis point assessment on all our deposits, so that's a big hit."
The one-time fee would take 20 cents from every hundred dollars of insured deposits. Why is the FDIC doing this? It's really a matter of 20-20 hindsight. During the economic crisis of the 1980s, the FDIC increased premiums to insure the fund had enough money to withstand large scale bank failure. However, in the early nineties, the economy boomed, leaving the FDIC's insurance fund flush. Congress ruled the FDIC did not need to collect any more capital and between 1996 and 2006, most banks didn't pay premiums. Recently, the economy has gone down again and banks have started to fail, over forty in the past year and a half. The FDIC now faces a severely depleted fund, leading to premiums like this one-time assessment. Gibson says the assessment would cost the Murray Bank 350,000 dollars.
"It comes out of your gross profits. It allows you for less money to go to improvements to the community for donations, for additional employees, for improvements."
Gibson says his institution is strong and can withstand the hit, but some other banks which don't make as much profit, wouldn't be as fortunate.
"It could take their capital levels to where they're no longer well capitalized. Or it can put in place where they're looking at I talked to a banker in West Kentucky. They're looking at layoffs for this coming year."
Gibson says as soon as the FDIC announced the fees, community bankers began responding. Approximately 8,000 of them sent around fourteen thousand letters to the FDIC and their federal legislators. Michael Radcliffe is Vice President and Compliance Officer for Community Financial Services Bank (CFSB). He says in a letter to Kentucky US Senator Mitch McConnell that the proposed increases would equal a quarter of the bank's projected annual income.
"The FDIC's actions will cause a ripple effect through the credit markets and the economy as banks are forced to raise fees and rates in an effort to raise the funds necessary to pay this one-time' assessment. At a time when the American consumer needs access to affordable credit this will accomplish the opposite."
CFSB President Betsy Flynn says the FDIC and the federal government need to recognize the importance of community banks to the health of the entire economy. Local banks shouldn't be punished, she says, for the sins of others.
"Community banks aren't the cause of the problem. It was the mortgage bankers and Wall Street that have caused the problems in the financial industry and the credit sources."
Local bankers still have a chance to influence the FDIC's one time premium during a thirty day comment period. Flynn acknowledges it's in all bankers' best interests to keep the FDIC in the black, but she and other members of the Independent Community Bankers of America (ICBA) have lobbied to reduce the assessment.
"We are certainly willing to pay a fair assessment into that fund to make sure that it does stay solvent for the benefit of our depositors and for our whole financial system."
The ICBA has proposed a five percent one-time assessment rather than the previously suggested twenty percent. And that could happen if the US Congress votes to allow FDIC to borrow up to $100 billion, a 70 billion increase from its current limit. If that happens the proposed one-time fee could be as low as six percent, and bankers hope to see the FDIC find that last one percent and to meet their request. That would mean independent banks wouldn't have to reduce services. Ronnie Gibson says it's important for local banks to continue to provide services in a downturn . . . like affordable loans.
"Last year was one of our best years in loan growth. And a lot people turn to community banks in times like this. Our business plan has never, never changed, and it won't change. But some of the others are going to have a different outlook."
Economic analysts are unsure how many more large banking institutions will fail, whether bank nationalization will be a short term or long term option, or when the housing market will boom again. But bankers like Flynn and Gibson say no matter what, no one is going to let the FDIC go under. They're just, like most other people in the current economy, trying to figure out where the money's going to come from.