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Thursday, July 17, 2008

"It's FDIC, so who gives a damn?"

by Tanta on 7/17/2008 08:43:00 AM

We had so much fun--I use this word advisedly--with IndyMac and moral hazard yesterday that I have to return to the well. It's a nice deep one.

From Bloomberg this morning:

July 17 (Bloomberg) -- IndyMac Bancorp Inc.'s collapse may spur withdrawals from banks ranging from First BanCorp in Puerto Rico to Los Angeles-based Nara Bancorp Inc. as customers trim accounts below the $100,000 limit on deposit insurance, according to Sandler O'Neill & Partners LP.

``IndyMac's failure has people worried about others,'' Mark Fitzgibbon, a principal at Sandler O'Neill, said in an interview. Fitzgibbon told clients in a report this week that signs of weakness may prompt customers ``to more actively move deposits to banks that are perceived to be healthier.''

The result could be a liquidity squeeze at banks that rely on ``jumbo'' deposits, Fitzgibbon said. His report, published July 15, included more than 50 companies with jumbo time accounts, typically certificates of deposit, that exceeded 25 percent of first-quarter deposits.

Topping the list was First BanCorp at 72 percent. Puerto Rico-based Doral Financial Corp. had 60 percent and Nara Bancorp had 53 percent, according to Sandler. Bank of America Corp., the biggest U.S. consumer bank, stood at 12 percent at the end of 2007; the report didn't have more recent data.
If any of you would like my personal opinion, for what it is worth, I wouldn't put $12.72 in a bank with 72% jumbo deposits. Certainly not after this:
Alan Cohen, senior vice president of marketing at First BanCorp, said in an interview that Fitzgibbon's report contained ``grave inaccuracies.'' In an e-mailed statement, the company said Sandler should have excluded brokered CDs, ``a stable source of funding.'' Without those, jumbo time deposits equal about 8 percent of total deposits, the bank said.
Whoa, Nellie.

Really, the issue with "jumbo" deposits is, precisely, the extent to which such large deposits are "brokered" versus "core." A bank's "core deposits" are those made by individuals and businesses in the bank's local market areas who have some retail relationship with the bank--checking accounts, loans, what have you. Brokered deposits are also frequently referred to as "hot money," and the idea that First BanCorp considers them a "stable source of funding" ought to raise a few eyebrows. Here's the federal regulators' take on the subject:
Deposit brokers have traditionally provided intermediary services for banks and investors. Recent developments in technology provide bankers increased access to a broad range of potential investors who have no relationship with the bank and who actively seek the highest returns offered within the financial industry. In particular, the Internet and other automated service providers are effectively and efficiently matching yield-focused investors with potentially high-yielding deposits. Typically, banks offer certificates of deposit (CDs) tailored to the $100,000 FDIC deposit insurance limit to eliminate credit risk to the investor, but amounts may exceed insurance coverage. Rates paid on these deposits are often higher than those paid for local market area retail CDs, but due to the FDIC insurance coverage, these rates may be lower than for unsecured wholesale market funding.

Customers who focus exclusively on rates are highly rate-sensitive and provide less stable funding than do those with local retail deposit relationships. These rate-sensitive customers have easy access to, and are frequently well informed about, alternative markets and investments, and may have no other relationship with or loyalty to the bank. If market conditions change or more attractive returns become available, these customers may rapidly transfer their funds to new institutions or investments. Rate-sensitive customers with deposits in excess of the insurance limits also may be alert to and sensitive to changes in a bank's financial condition. Accordingly, these rate-sensitive depositors, both under and over the $100,000 FDIC insurance limit, may exhibit characteristics more typical of wholesale investors.
It was, after all, one of Senator Schumer's biggest complaints about IndyMac in his famous letter to the regulators that, as of June 2008, 32% of IndyMac's total deposits were brokered and that the bank was insufficiently capitalized to withstand that risk.

We had a number of folks arguing yesterday that the $100,000 insurance limit should be raised to account for inflation. Atrios suggested that yesterday. Part of my own wariness over that stems from the fact that so many of the "jumbo deposits" of these banks are, indeed, "hot money," not your basic middle-class family with $250,000 in the local bank in nice stable core deposits. At First BanCorp, it appears that only a shade over 10% of jumbo deposits are core deposits.

Of course, it's hard to say how stable core depositors are, these days. The trouble with trying to assess the risk of bank runs or deposit destabilization is that people are, well, people, and they can respond very differently to the same situation. From Bloomberg:
Martha Duran made the 75-mile drive from Running Springs, California, to close her CDs. She waited from 8:30 a.m. to 4 p.m. on July 14, ending up with sunburn on her neck and an appointment for noon on July 15.

``This is a scare of a lifetime,'' said Duran, a 70-year-old retired office administrator. ``I worked hard for my money. I may not be a millionaire, but every little bit counts.''

Not everyone visiting the bank was there for withdrawals. Sanford Mazel, a 74-year-old retired U.S. Postal Service employee from Altadena, California, came to make a deposit, saying he was reassured by the government protection.

``It's FDIC, so who gives a damn?'' Mazel said. ``Let the world go to hell. The money will be there.''
I think it would be hard to write any banking policy that would discourage Martha from being part of a bank run or encourage Sanford to panic.