Published by The Wall Street Journal on December 25, 2012
Small Banks to Depositors: Trust Us
Dec. 31 Expiration of FDIC’s Unlimited Guarantee Drives a Scramble to Allay Customers’ Concerns
Small banks around the country are spending the last days of 2012 trying to assure customers they can be trusted to hold their deposits, as the government’s unlimited insurance on certain accounts expires this year.Many of the affected accounts are essentially noninterest-bearing checking accounts that hold more than $250,000. The Federal Deposit Insurance Corp. granted unlimited insurance to these accounts—often held by businesses, municipalities and other entities that require quick access to large amounts of money for payrolls and other needs—at the height of the financial crisis to help instill confidence in the nation’s smaller banks. The goal was to prevent account holders from moving money from smaller institutions to larger ones viewed by customers as less likely to fail.
After the program, known as the Transaction Account Guarantee, expires Dec. 31, noninterest-bearing accounts will receive the same $250,000 insurance coverage that the FDIC provides for other depositors. Roughly $1.5 trillion of deposits are covered by the expiring guarantee, according to the FDIC.
The change has executives at small banks reaching out to affected customers to encourage them to stay put. “We want people to know their money is safe at our bank,” said Paul Murphy, chief executive of Cadence Bancorp LLC in Houston. The holding company owns Cadence Bank, which has more than 100 branches in six states. The bank has been preparing a flier to alert customers to the insurance change and explain it to them. Cadence has $5.4 billion of assets and $3.1 billion of deposits.
At Broward Bank of Commerce, “we are telling our customers that we have a loan portfolio that has no nonperforming loans, which is a very clear statement that our bank is very solvent, very safe and very secure,” said Keith Costello, chief executive of the bank, which concentrates on small and midsize businesses. The Fort Lauderdale, Fla., company, a unit of Broward Financial Holdings Inc., has $129 million of assets and $117 million of deposits. Mr. Costello said he has been in touch with the bank’s larger customers and has received some calls from depositors who had questions about the change.
Banks also are helping affected depositors shuffle money into alternatives that can protect them from the insurance issue. Among other options, they can buy products that allow depositors to spread money across multiple banks to ensure the funds are insured. Such strategies could help reduce the movement of cash into money-management firms that fear a flood of new funds could further depress low yields. In recent weeks, BlackRock Inc. BLK -1.02% and Federated Investors Inc. FII -0.54% have told investors that some money-market funds could be closed to new customers as a result of the insurance expiration, people familiar with the situation told The Wall Street Journal earlier this month.
Michael Tuttle, the CEO of a community bank in Vermont, said his firm has identified a handful of customers who exceed the $250,000 insurance threshold. “We started sending notices to them about a month ago about the prospect and are reaching out to them individually to talk about their preferences,” said Mr. Tuttle, who runs Merchants Bank, a unit of Merchant Bancshares Inc. MBVT +0.07% in Burlington. The bank has $1.7 billion in assets, $1.2 billion in deposits and about 30 branches.
The expiration of TAG comes after smaller banks unsuccessfully lobbied Congress to extend the unlimited coverage on the grounds that its elimination would give an unfair advantage to large banks. They also said that the guarantee is good for the financial system because it helps ensure that deposits are diversified among banks of all sizes.”No one knows how much money will flow out of these banks, but the last thing we need is any more concentration in those large institutions,” said Paul Merski, chief economist for the Independent Community Bankers Association, a trade group that pushed to get the guarantee extended.Bankers say that municipalities, nonprofit groups and law firms are particularly sensitive to the insurance guarantees because their deposits come from taxpayers, clients or donors and therefore have a stronger fiduciary duty.
Chip Flowers, the state treasurer of Delaware, earlier this month issued an order that requires all of the state’s noninterest-bearing deposits to be backed by bank collateral. Delaware typically has between $200 million and $400 million sitting in noninterest-bearing accounts. Mr. Flowers said the state is now negotiating those collateralization agreements with its six banks, including Wells Fargo WFC -0.29% & Co., PNC Financial Services Group Inc. PNC -0.99% and M&T Bank Corp. MTB -0.33%. “It has been a pain, but at the same time it is necessary—why would you put taxpayer money at risk?” Mr. Flowers said.
Several bank executives said they haven’t seen any large withdrawals so far, but acknowledge that such a move could happen in the future—especially if the economy weakens. That could be bad news for small institutions that are having a tough time navigating a low interest-rate environment and tepid loan demand. “Any large movements of high-value account deposit balances out of smaller institutions with weaker profiles could potentially contribute to further consolidation among small banks, which already face elevated compliance costs, eroded net interest margins, and a need to retain larger amounts of regulatory capital,” Fitch Ratings said in a news release last week.
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