Headlines can be misleading, and in a time of financial crisis, that can make matters worse.
Pick up a paper, or listen to the quick burst of news on TV or radio, and what you get are reports of a subprime crisis, a “banking” crisis and market turmoil. That’s only intensified on the rare occasion that a bank fails.
Let’s set the record straight: The banking industry-traditionally federally insured, federally regulated depository institutions-your local commercial bank, thrift of savings bank-is safe and sound. And your account in commercial banks, thrifts and savings banks carry FDIC insurances. That means your account in a federally insured bank is protected up to $100,000, with additional protection for joint accounts, and $250,000 for a retirement account.
The Federal Deposit Insurance Corporation has more than $52 billion in assets to protect depositors like you.
In addition, the banking industry’s capital is at historic highs. As of March 2008, the industry held $1.36 trillion in capital, plus $120.9 billion in reserves, for a total buffer of $1.48 trillion.
The challenge we are facing is that words matter. And when one word is used to mean several different things, it inevitably creates confusion. For example, we know what is bank is-or at least we think we do. Sometimes a business that wants to add status to its name will call itself a bank even though it is not an insured depository institution. It was an “investment” bank.
The word bank is also applied to mortgage firms. Their function, their purpose and their regulation differ from federally insured deposit institutions.
Yes, there are challenges in today’s market economy. And yes, banks will fail. When that happens, a well-qualified resolutions team is put in place that employs a well-established process that protects depositors with as little disruption to the financial system as possible. Such is the case with the recently failed IndyMac Bank in California.
Having a safe and sound banking system to rely on shows the importance of the role banks play in our local communities and in our nation’s economy. They are the source of stability and of growth. That is true regardless of their asset size, their charter or their business plan. And the vast majority of banks today hold more capital than the law requires.
Today’s “crisis” also underscores the fact that there are two ways financial institutions can fail. They can fail due to capital insolvency or because they are liquidity insolvent.
What we are now experiencing in the banking environment is a lack of liquidity, not a lack of capital. Capital remains strong, strong for investment banks as well as for commercial banks and thrifts.
The liquidity crisis that we have seen on Wall Street comes from a crisis of confidence. In the 1930s, before deposit insurance, banks failed because of a crisis of confidence that led to liquidity insolvency. That can also happens to an investment bank such as Bear Sterns. There is a crisis of confidence, lending lines are pulled, liquidity evaporates and insolvency is inevitable.
We all know that our financial system is being tested. But let us also remember that the system is showing its resiliency.
The Federal Reserve Board has acted to help restore liquidity by assuring everyone that they are responding to the problems in a measured way. The Fed opened up its lending facility known as the Discount Window to Wall Street firms and is taking steps to restore liquidity to the markets. In addition, the Office of Federal Housing Enterprise Oversight has reduced the capital surcharge imposed on Fannie Mae and Freddie Mac so they can buy an additional $200 billion in home mortgages. And the Federal Housing Finance Board will allow the nation’s 12 Federal Home Loan Bank’s to purchase more mortgage-backed securities to provide greater liquidity in the mortgage markets.
Meanwhile, those headlines and news reports that keep repeating the word “crisis” overlook the fact that the subprime lending crisis was caused by unregulated brokers and
Wall Street institutions themselves, sometime using the title “bank,” and not by regulated insured banks.
Federal regulated banks employ underwriting practices to avoid losses and to promote safe and sound operations. And when they do not operate appropriately, their regulators, who visit them at least annually, will take exception to such practices and require corrective action.
Our banking system is strong. The crisis will pass, as have others in the past, and the result will be a stronger financial system with fewer unregulated players and a reminder that liquidity and capital are both important to solvency.
First Citizens Bank of Georgia