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Bailing out banks beyond FDIC insurance is akin to writing checks for reckless behavior
Dennis Wyatt 2022
Dennis Wyatt

Most banks as late as the 1960s were open Monday through Thursday from 10 a.m. to 3 p.m. with Friday hours extended to 6 p.m.

If the bank wasn’t open, you couldn’t access your account except by writing a check.

Now most banks are open 9 a.m. to 5 p.m. They even have Saturday hours.

ATMs long ago made money accessible 24/7 but you still had to travel to an ATM.

Then came debit cards where you can swipe it at a cash register at noon today and by 12:10 a.m. it can be taken out of your account.

That makes a check that could take a week or longer to clear Stone Age financial technology obsolete.

Now with a smartphone, account numbers, and a password you can spend money wherever you can access the internet.

The technology side of banking has changed.

The basic art/science of banking hasn’t changed.

Banks still collect deposits and use those io generate income whether it is by loaning money out or investing.

Banks still need to judge creditworthiness to assess risks when they loan money.

There was a time when a local branch manager had some discretion based on an applicant’s character. Now it’s pretty much formula driven. At least for the little guys.

And let’s be clear, the little guys — banks and depositors — is what we should be worried about.

Not Elon Musk. Not Walmart. Those guys are big enough to take care of themselves and have amassed great amounts of money.

And if they are foolish with their decisions that too often are driven more by greed for bigger and bigger profits as opposed to what used to be called reasonable and sound returns with where they place they money, that is their problem.

Or at least it should be their problem.

Polls last week indicated only 10 percent of Americans have high confidence in the banking system while another 57 percent have just some confidence.

Thirty-one percent say they have little confidence and 2 percent have no confidence.

Anyone willing to bet the 2 percent that have no confidence includes most of the 1.3 percent of Americans who make more than $500,000 a year?

Yes, two banks have failed.

Santa Clara-Based Silicon Valley Bank and New York-based Signature Bank.

The one impacting the California economy to a degree is Silicon Valley Bank.

Gov. Gavin Newsom understands that as well as anybody else.

He owns wine companies. And a number of wine companies/vineyard owners have business dealings and accounts well over $250,000 in Silicon Valley Bank.

Why $250,000 is a  magical number is simple.

The Federal Deposit Insurance corporation (FDIC) — without a presidential decree or congressional intervention  — will cover up to $250,000 per depositor per bank that is insured.

It hasn’t always been that way.

The FDIC was implemented in 1933  after a series of bank runs — and subsequent failures — that helped trigger the Great Depression.

The original limit was $2,500 that would cover an individual account at a FDIC insured bank.

Over the years the limit has been adjusted upward. The last was in 2008 when it was bumped up from $100,000 to $250,000.

As such it is clear the FDIC was created — and exists  today — to protect the little guy.

Working class families. The middle class. Small businesses.

It wasn’t meant to protect the big guys or those with boatloads of money.

That said, someone with $10 million in cash could easily open 40 accounts at 40 different banks that are FDIC insured as have every penny protected in the event of a failure.

That doesn’t happen because such fairly well-heeled households want bigger  returns for their money. Bigger returns require taking bigger risks. Risks that shouldn’t be covered by taxpayers.

So why, you might ask, don’t people have a higher degree of confidence  in banks.

What do we have to lose?

The median transaction account balance in banks for American households in 2019 was $5,300.

That is gleaned from the Federal Reserve’s Survey of Consumer Finances. Transaction accounts include savings, checking, money market and call accounts, as well as prepaid debit cards.

While it is a far cry from $250,000, keep in mind a couple of things.

Over 99 percent of America’s 28.7 million  firms are small businesses according the JP Morgan Chase Institute. The vast majority — 88 percent  — have fewer than 20 employees.

If a small business has 20 workers paid $30,000 a year – once payroll costs such as disability insurance, unemployment, the employer’s share of Social Security and such are factored into the equation — the cost per employee is close to $40,000.

That’s $800,000 a year in payroll or $67,000 a month.

Then there are other costs of doing business — inventory, energy, vehicle operation and maintenance, rent, etc. All of that costs money.

A small business could easily have $250,000 in its account at any one time not sitting there as earnings as households do but as income from business that has it to cover the costs of doing business.

From that perspective of 88 percent of Americans employed by firms with 20 or fewer workers, the $250,000 protects the little guy who works for a paycheck  above and beyond what they have in the bank.

Silicon Valley Bank and Signature Bank failed because they played fast and loose with the basic tenets of banking that includes liquidity. Regulators did exactly what they are supposed to do when  such behavior surfaced.

But the federal push to guarantee deposits — those above $250,000 —  is not what the government’s part of the bargain that was forged in 1933.

It’s akin to writing blank checks to support reckless behavior.

Perhaps that’s why most people have just some confidence in banks.

But in all honesty, none of us with $250,000 in “cash” assets in savings/checking or who have more but are smart enough not to put all of their $7 a dozen eggs in one basket should lack confidence.

Acting as if we are not confident emboldens politicians to take steps to protect the reckless behavior of  banks and arguably those who play the economy as if it were a casino game.

In a way many banks — as well as many of us — have changed.

Steady, solid growth in  terms of profit for banks — as well as what individuals do for themselves — has given way to get rich quick tendencies.

Good banking and gambling are opposite disciplines

Play fast and loose with either one and it shouldn’t surprise you if you fold.