Tuesday, May 12, 2009

More on the FDIC

From Barry Ritholtz

“At DeMotte [State Bank, an 11-branch operation in the northwest part of Indiana, Bank President] Mr. Goetz is bracing for a steep increase in a crucial overhead cost: the bill from the Federal Deposit Insurance Corporation, which is basically an insurance fund underwritten by banks.

Last year, DeMotte paid $42,000 into the fund. This year, because of failures in other parts of the country and particularly among national banks, that sum will rise to $500,000 or more.

“Isn’t that the American way?” he says, folding his arms. “Whoever is left standing, whoever was prudent, is always the one who has to pick up the pieces.”

From Liberty Bell Bank in NJ:

“They ask us to build capital, lend more, but steal all the “material” we would use to do exactly that! And who wants to buy our shares when we keep reporting virtually no earnings even tho we grow 30%!! and have no unusual loan problems! Last year, FDIC also made us (and thousands of others I am sure) add a few hundred thousand to loan loss reserves. We wont lose the money, so eventually get it back, but this clobbers earnings. Then, adding insult to injury, Ben Bernake takes 500bps off of prime, with a third of our loans tied to prime. I have to write letters to our savers saying “because mega banks need cheap money, I have to cut the rate we pay you on your savings”.

More screwing of the little ones in the economy, little banks, little savers! Why do we have to pay for the big bad banks who finance their assets with 25 cents of domestic deposits on the $1 while we have to use $1 of domestic deposits and pay insurance on that? I guess if we could issue debt like the biggies, we’d get a guarantee but of course small banks can’t economically do that. We can’t permanently keep a block of free federal funds on the balance sheet. So, we don’t have that “cheap money” to boost our profits. Gave a talk to Haverford Trust people yesterday and several in attendance were investors in and/or attended little bank board meetings and report the same hits on profits. bummer!"

Like I keep saying, the FDIC should not exist. It was conceived as a barrier to entry by larger banks looking to keep out smaller banks. It is extremely difficult to make an economic profit as a bank unless you create significant efficiencies that are just not possible in a small bank.

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