As concern mounts over the condition of the U.S. financial system, several local banks are promoting their membership in a group that enhances the federal deposit insurance protection for its customers.
It’s a clever idea to tap into anxiety about the safety of bank deposits in the wake of the Federal Deposit Insurance Corp.’s recent takeover of IndyMac Bank, the third largest bank failure in U.S. history.
Widely circulated pictures of nervous depositors lined up outside an IndyMac branch to withdraw deposits create troubling images for bank regulators, who have one overriding fear: unreasonable panic on the part of average depositors.
For the most part, those fears are misplaced.
The FDIC guarantees up to $100,000 per depositor per institution, and there are numerous simple ways to double or triple that coverage by creating joint accounts. Salisbury Bank and Trust Co. goes one step further by offering up to $50 million in FDIC deposit insurance per customer through its membership in Certificate of Deposit Account Registry Service, which splits large deposits into increments of less than $100,000 and distributes them among CDARS member banks.
FDIC deposit insurance has a perfect track record over several decades, and there’s no reason to believe that it couldn’t withstand the collapse of a dozen or more IndyMacs because it is backed by the full faith and credit of the United States government.
That unlimited federal backing is designed to prevent an isolated failure from turning into the sort of full-scale depositor panic that triggered Depression-era runs on banks. The FDIC was created to prevent bank runs, and it’s a safe bet that it fully addresses the problem.
Even so, fears about the depth of the credit crisis are stirring unusual market anxiety, triggering a huge wave of short-selling by hedge funds and others of stocks in financial institutions.
Short-sellers bet that a stock will decline by selling borrowed shares in the hope of buying them back at a lower price. A wave of short-selling can cripple a stock. Even relatively well-capitalized banks with manageable credit quality issues have been swamped by the recent tsunami of short-selling.
The phenomenon nearly wrecked mortgage finance giants Fannie Mae and Freddie Mac earlier this month before Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson pushed a plan to allow the government to buy shares in both.
So Fannie and Freddie shareholders got a gift from taxpayers. Just months earlier, the government didn’t go to the same trouble for the shareholders of Bear Stearns, who lost virtually everything in that federal rescue. Apparently regulators saw the deterioration of Fannie and Freddie as even more of a threat to the system than the collapse of Bear Stearns, and so they asked taxpayers to go the extra mile.
Recent limits by the Securities and Exchange Commission on short-selling are no more reassuring. While stressing that the practice is a necessary market tool, the SEC enacted “emergency” short-selling rules applying to 17 financial firms, Fannie and Freddie for 30 days.
Competing financial institutions were understandably miffed that they weren’t included on the list, leaving them exposed.
The SEC’s band-aid approach seems arbitrary and is obviously only temporary. What comes next?
Probably not bank runs. But it’s hard to blame individual depositors from seeking any available shelter, and it’s appropriate for banks like Salisbury Bank and Trust to try to offer it to them.
