October 2008 Legal Briefs

           On September 26 the FDIC announced changes in how it calculates deposit insurance for POD accounts and living trusts. These changes are effective immediately. The two primary benefits are (1) simplifying the process of determining how much deposit insurance is available for these accounts, and (2) greatly expanding the list of insurable beneficiaries on a POD or living trust account.

 

          Any account insured under the old rules will still have at least as much insurance as before.  (This is true even before considering the temporary increase in insurance coverage that was just passed by Congress; but I will ignore that increase here, to make it easier to explain only the changes discussed in the September 26 announcement.) For individuals who previously were not fully insured, the POD changes can be used immediately to increase deposit insurance coverage. These changes, combined with the temporary increase in deposit insurance, should go a long way to ease concerns of customers who wonder if they should move part of their deposits to another bank.

 

 

          In recent bank liquidations the FDIC has delayed before fully paying the deposits of some living trusts, because of the effort required to interpret those trusts’ complex provisions to determine exactly how much FDIC insurance is available. (It’s hard even for the FDIC to understand certain trust provisions.)

 

          FDIC made several earlier attempts to clarify the insurance of revocable trusts for bankers. (The most recent attempt was an 83-page guide on that subject, issued by FDIC this spring—which I discussed in my May 2008 article. That guide has now been pulled down from the FDIC’s website and will be modified to conform to the latest changes.) 

 

          Despite its previous efforts to make things simpler, the FDIC has continued to receive a high volume of requests for interpretations of how FDIC insurance will apply to trusts containing various provisions. FDIC decided its rules were still too hard to understand, so now it has “streamlined” the provisions further.

 

 2. “Qualifying Beneficiaries”

 

          If you have worked with deposit accounts, you are aware that “per-beneficiary” FDIC coverage (up to $100,000 per named beneficiary–now changing to $250,000 on a temporary basis), for either POD accounts or revocable (living) trust accounts, has been available only for “qualifying beneficiaries”—meaning, the beneficiary must be either a spouse, child, grandchild, parent, brother or sister of the accountholder. 

 

          What the FDIC has done now is to eliminate the requirement that an insured beneficiary be related to the owner at all.   (Any living person now qualifies.) In addition, FDIC has added charities as insurable beneficiaries. (Many living trusts name the church, a university, a school, a foundation, etc., as beneficiary.)

 

          In the changed provision, a beneficiary eligible for per-beneficiary coverage (by POD provision or under a trust) can be (1) any “natural person,” (2) any “charitable organization . . . recognized as such under the Internal Revenue Code of 1986” [i.e., a Section 501(c)(3) charity], or (3) any “other non-profit entities.”

 

          Allowing “any living person” to be named as an insurable beneficiary will help many depositors to increase FDIC insurance, in situations where the previous rules were not broad enough to include all beneficiaries that the depositor wants to name as heirs. Here are some examples of beneficiaries that an owner for the first time will be able to count for insurance purposes: (1) a niece or nephew, (2) a great-grandchild, (3) a “domestic partner” (unmarried), or (4) a friend or caregiver.

 

          Although the FDIC rule would permit naming a beneficiary that is any kind of “non-profit entity,” many such entities are not qualified with the IRS as charities. Under state law (Section 901(B)(1) of the Banking Code), a non-profit entity can be named as a POD beneficiary only if it is also qualified with the IRS as a 501(c)(3) charity. However, state law does not limit who the beneficiaries of a living trust can be, so they could include even a non-profit entity that is not a charity—for example, a social organization or civic club.

 

 3. Trust Deposits up to $500,000

 

          If a revocable (living) trust names five beneficiaries or less, and the total deposits of the trust are $500,000 or less, the new rule will allow a bank to determine total deposit insurance for the account by simply multiplying the number of beneficiaries by $100,000.  (This can greatly simplify the process, because a bank employee will not need to read the trust to find out whether some of the beneficiaries are entitled to different dollar amounts, or different fractional amounts, than others.)

 

          Here’s an example. A trust’s deposits total $400,000. The trust agreement would distribute the money to beneficiaries as follows: $150,000 to Child A, $150,000 to Child B, $50,000 to the church, $25,000 to a nephew, and $25,000 to a friend. Under the old rules, the shares to Child A and Child B were only insurable for $100,000 each, and the shares to the church, nephew and friend would not be insured at all on a per-beneficiary basis. The maximum insurance for the trust (under the old rule) would be $300,000, on the basis that the children’s shares are insured to $200,000 total, and the shares belonging to all of the non-qualifying beneficiaries combined ($100,000) can be insured under the owner’s individual insurance category—provided that the owner does not already have individual accounts falling within that category. The total “excess” ($50,000 plus $50,000 in the two children’s shares) would have been uninsured.

 

          Let’s compare this outcome to the new, much simpler rule, which says, if you have five beneficiaries (completely ignoring the differing size of their separate shares, which you are allowed to do), you multiply five times $100,000. This gives you a maximum of $500,000 insurance potentially available for the trust’s account. However, since you only have total deposits of $400,000, the trust is insured for that lesser amount, $400,000. (If more funds are added later, up to a total of $500,000, the whole account is still insured.)  All of the other considerations are eliminated. This breaks from past FDIC policy, but will greatly simplify insurance determinations for all trust deposits of $500,000 or less.

 

 

          If a trust has at least six beneficiaries, and over $500,000 of deposits (which most trusts do not), then deposit insurance will continue to be determined under the previously existing rules that required a bank to determine the amount of each separate beneficiary’s share, limiting the insurance of any such share to $100,000 (even if some shares are larger than that amount), and then adding up all of the separate insured amounts to determine the total insurance for the trust’s deposit.  

 

          (I will continue to use $100,000 in this example. Of course, separately, the amount was increased by Congress on October 3 to $250,000, but will decrease again to $100,000 after December 31, 2009. Obviously, $250,000 covers a lot of issues and clears away much of the need to focus on details. I will use $100,000 for this illustration, however, because banks will probably want to “work ahead” by structuring deposits in a way that will still be insured after the deposit insurance drops back to $100,000.)

 

          Let’s say a trust has $600,000 of deposits and six beneficiaries. The trust says that the church gets $50,000, the university gets $50,000, and the medical foundation gets $50,000. The three kids get the remainder, in equal shares ($450,000 divided by three equals $150,000 each).   Child 1 would be insured separately only for $100,000 (ignoring the temporary increase); Child 2 for $100,000; and Child 3 for $100,000; and the three tax-deductible charitable entities are insured for $50,000 each. Total of the separate insured amounts is $450,000 (out of a total deposit of $600,000).

 

          However, the FDIC provides a special rule that this trust (with over $500,000 of deposits and an least six beneficiaries) can have a basic $500,000 of deposit insurance even without calculating the separate beneficiaries’ insurable shares; or it can have an amount of deposit insurance calculated by adding up the individual beneficiaries’ insurable shares, whichever total is greater.   In the example above, $500,000 is greater than $450,000, so the trust with $600,000 of deposits would be insured for $500,000.

 

          By changing the facts, let’s assume that the three charities still get $50,000 each, but the $450,000 remainder of the trust gets divided among four children. The children’s shares would be insured for a total of $400,000 (ignoring the increase), the charities’ shares would be insured for a total of $150,000, and the total obtained by this method would be $550,000. Since $550,000 is greater than the $500,000 basic amount, the trust would have $550,000 of insurance on a $600,000 deposit.

 

          Changing the facts again, let’s assume the remainder amount of $450,000 gets divided among five children. Each child would have a right to $90,000, so each of those shares is within the $100,000 per beneficiary limit (ignoring the increase). The combination of all of those shares ($450,000) is fully insurable, the three charities’ shares (totaling $150,000) are fully insurable, so the trust’s total insurance is $600,000 (the amount of the total deposit).

 

          Admittedly, the new rules don’t make it any easier to calculate the total deposit insurance for a trust with at least six beneficiaries and over $500,000 of deposits, when any of the beneficiaries’ shares are not equal to other beneficiaries’ shares. But if you had a trust with $700,000 of deposits and seven equal beneficiaries, you still could still just multiply the number of beneficiaries by $100,000 (ignoring the temporary increase), resulting in $700,000 of deposit insurance.

 

 

          One of the messiest problems under the previous FDIC insurance provisions was trying to determine the amount of deposit insurance available for a living trust after the owner dies. As I discussed in my May article (describing the old FDIC rules), when the owner of a one-owner living trust died, the same per-beneficiary coverage that existed before death would continue for a six-month “grace period” following death, but after that time the deposits would become insured like any other “irrevocable trust.”  Unfortunately, the deposit insurance rules for irrevocable trusts were (and remain) much stricter; and it was never safe to assume that an irrevocable trust could have more than a total of $100,000 of deposit insurance without carefully reading both the trust itself and the specific section of the insurance rules.

 

          The new FDIC changes state that if a revocable (living) trust becomes irrevocable because of the death of the owner, the same insurance coverage that the trust had in effect before the owner died will remain in effect after the owner’s death (and not just for a six-month period).   This greatly simplifies things—but assumes that the number of resulting beneficiaries has not changed after the owner’s death.   

 

          Please be aware that with a two-owner (joint) living trust, often called a “family trust,” a number of different scenarios might apply after the first owner’s death. (For example, the trust might split into two separate trusts, or, alternatively, all of the deceased spouse’s share might become directly owned by the surviving spouse). When there is a two-owner trust, someone needs to carefully sort out what happens under the structure of the trust after the first owner’s death. Until this is known, it should not be assumed that deposit insurance for the trust will remain the same. 

 

          There still are certain “irrevocable” trusts that did not start out as revocable (living) trusts. This includes trusts established under a will, and life insurance trusts.  For these fairly uncommon trusts, deposit coverage remains as difficult to determine as before. The bank should start by assuming that such trusts do not receive “per beneficiary” coverage, until the provisions of the trust can be carefully compared to the FDIC insurance rules.

 

          The FDIC emphasized recently that banks should start training all employees to answer questions about deposit insurance, at least on a basic level—beginning with tellers.  This is very practical, so that any bank employee who is approached by a customer at church, at the grocery store, etc., will already have the right answers to reassure that customer. Any bank employee who gets questions should be ready to answer the simpler issues quickly, and should personally put that customer directly in touch with someone who can answer more complicated deposit insurance questions to the customer’s satisfaction.

 

          Events in the financial world have become very unsettling. It’s more than the average person can begin to understand. Lack of understanding or “lack of control” can create anxiety, and even fear. When customers have no idea what to do in response to the news on TV and in the newspapers, they have a basic need to be told, “Your bank deposits are O.K; you’re protected.”  

 

          All bank employees should be careful not to provide vague or uncertain answers that leave the customer uncomfortable about whether his deposits are fully insured. If a customer asks about trust deposits, for example, and a teller states, “I think your deposits are insured for $100,000,” that answer is inappropriate for two reasons: (1) Even before now, with proper structuring of accounts the customer could enjoy much higher insurance limits, and stating too low a number could do more harm than  good, resulting in deposits leaving the bank; but also (2) with the temporary increase in insurance limits, the “basic” answer is really $250,000 instead. The bank does not want any customer walking away because a bank employee today says, “$100,000.”  

 

          It’s one thing (and understandable) if a depositor moves funds to another bank because there’s too much to be fully insured at your bank—although this is much less likely to be true under the temporary deposit insurance increase. It’s a different matter (and a tragedy) if the customer moves deposits because he doesn’t realize that more deposit insurance is available if his accounts are structured properly—and no one has explained to him how the insurance rules apply to his specific situation.  

 

          When an existing customer starts asking about deposit insurance limits, and whether he is fully insured, this question should immediately get any bank employee’s attention. All bank employees should recognize clearly that what’s at stake with this question is retention of deposits. 

 

          If large corporations and some banks around the country continue to experience serious liquidity problems, there will be increasing competition for available funds from all sources.  In Oklahoma the competition for deposits is still fairly “local.” However, I expect to see out-of-state deposit brokers soliciting deposits in Oklahoma by advertising in newspapers, and offering rates substantially higher than local banks are paying.

 

          If deposit rates remain reasonable, banks in Oklahoma should work carefully to retain existing customers’ deposits as much as possible. (Going over specific details of a customer’s deposits and reassuring that customer about full insurance coverage is a small price to pay for retaining deposits, and every employee of the bank should be focused on the value of doing so.) It will almost certainly be more expensive and time-consuming to attract replacement deposits than to retain the existing low-cost deposits of customers who already know and trust the bank.  

 

          I will discuss several aspects of the “deposit retention” issue, below.

  

 

          Why should a bank train tellers to answer questions about deposit insurance? (Aren’t “new accounts” people supposed to be the ones who know this stuff?) In the past, deposit insurance has certainly been viewed as a subject mainly relevant in opening new deposits. 

 

          In turbulent times, deposit insurance can become (in some cases) of more critical importance at the “exit point”–when people are considering withdrawing their money–than it was at the “entrance point” when accounts were opened.

 

          If a bank customer is anxious enough that he is thinking about withdrawing his deposits, he probably is only willing to talk to someone he knows and trusts.  When a person has a problem that he can’t solve for himself, it’s human nature for him to think, “Who do I know that could give me more information or get me pointed in the right direction?”  It’s emotionally easier, and less threatening, to start with the known, working toward the unknown.

 

          The bigger the problem a customer has (and safety of deposits can be pretty important), the more that person needs to “connect” with someone who can be trusted to give a straightforward and reliable answer. Actually, the bank is lucky if there is anyone in the bank with whom the customer has developed this level of trust.  Although the bank might expect the customer to deal with deposit insurance questions by consulting the correct “department,” the customer is more inclined to fall back on bank “relationships” in approaching the issue.

 

          When an account was first opened, the employee whom the customer knew best might have been the “new accounts” person; but as time goes by, the customer interacts much more frequently with tellers than anyone else. As a result, many customers feel more comfortable asking their questions first to the tellers.  This is why tellers need a basic understanding of deposit insurance, to explain it with confidence when a customer asks questions.

 

 

          Loan officers can’t get off the hook, either, with regard to explaining deposit insurance to customers. A commercial lender is often in charge of all of a customer’s business relationships with the bank, and is usually the employee that the business customer knows best—and the person to whom the customer asks questions.

 

          There are also some unique issues to address with commercial customers regarding deposit insurance, because POD provisions (except for sole proprietorships) and joint tenancy accounts can’t be used to increase insurance.  (However, the temporary increase to $250,000 of deposit insurance will significantly address business customers’ concerns.)

 

          Unlike consumers, a commercial customer can easily have both large loans and large deposits. (A commercial loan agreement typically requires the business to keep all deposits at the bank, which may heighten anxiety about deposit insurance.) 

 

          In some circumstances it’s very useful for commercial customers to understand (and for loan officers to explain) that if a bank fails, the customer generally can elect to apply the “excess” deposits (above the FDIC insurance limit) against the loan balances owed to the bank at the time the bank fails (in other words, “netting” the two amounts). For example, if a corporation has $500,000 of deposits and $250,000 of loans, there would be a resulting “net” deposit of $250,000, which would be fully insured under the temporary increased limit–and the customer should have no loss. (The deposits and loans must be held by the same person or entity, for “netting.”)

 

          A bank may also consider purchasing private deposit insurance for an especially important depositor’s excess deposits (either for a company or individual) if even the temporarily increased insurance limit is not enough.  Such decisions are usually made case-by-case by loan officers and management—not new account officers or tellers.

  

 

          Many customers (individuals and businesses) have a strong desire for privacy in discussing their financial matters. Particularly in smaller towns, they may not want to outline the extent of their account balances, and their questions about FDIC insurance coverage, with “just anyone” at the bank. Maybe the customer is a bit embarrassed or doesn’t want to ask a possibly “stupid question” to someone he doesn’t know.     

 

          From a customer-service standpoint, when a customer has serious concerns the bank should make it as easy as possible for that person to discuss the problem with whomever he wants. The bank employee whom the customer knows best or trusts most will probably be the first contact if the customer is really worried. 

 

           A medical doctor is very familiar with “upset patients” and “hesitant patients,” and has developed various ways of talking to such patients in a professional, friendly and matter-of-fact way–perhaps even with a bit of small talk or light humor. This helps the patient to get through an examination and the diagnosis more easily.  The doctor verbally guides the patient through the process and helps the patient to realize that he is in good hands. Even if a patient is apprehensive, by the end of the visit he usually is glad that he decided to set up an appointment to talk with the doctor.  A depositor who is willing to listen to how deposit insurance applies to his own situation can go away reassured, and appreciative of the bank’s help and personal attention.  

 

           (Sometimes a person’s fears can run wild, inside his own mind, and will not stop.  If he can verbalize what’s bothering him to someone else, he can start to get a better perspective on the problem, cutting it back down to “real” size. If the other person listens well and provides some information that helps to solve the problem, the one who was worried can turn loose of his concerns and go away happy. When an approach for dealing with the problem is developed, the individual is no longer “stuck” in his uncertainty. This applies as much to a customer “twisted up” about deposit insurance as it does to a patient “stressed” over a possible medical condition.)

 

 

          A customer who is worried about deposit insurance might approach a bank employee anywhere to ask questions—at church, at the grocery store, at a ball game, or in a parking lot. In order to be ready for the unexpected, bank employees should have some answers prepared in advance.  

 

          A bank employee who is approached on the street should avoid making the following type of response: “Well, I really don’t know anything about FDIC insurance.  Maybe you should come into the bank sometime to ask the new accounts people.  That’s not the area I work in.”

 

          This might be interpreted as follows: (1) I don’t have answers, so your concern slides off me like Teflon. (2) You (the customer) didn’t know who to contact. You guessed wrong. (3) If you follow this up by coming to the bank (and I didn’t say it should be soon), I’m not the one you want to see. (4) You just need to start over. (The defeated customer may give up and take his money elsewhere.)

 

          A better response to the question asked on the street about deposit insurance might be, “I know you’re insured for at least $100,000 ($250,000 with the temporary increase), and it’s easy to have more insurance if your accounts are set up carefully.  I can’t answer all of your questions without knowing the specific details of your accounts, but we have people who can do that easily. Why don’t you come in to see me at the bank on Monday morning? What time would be good for you? I will introduce you to someone who can walk you through all of this.  We will do our best to answer all of your questions. You are important to us.”  

 

          Using the approach just outlined, the bank employee (although from another department) comes across as being very ready to address the customer’s concerns. That employee suggests an action plan (“come into the bank to see me”–on a specific day and time) and offers to personally introduce the customer to the right person. From there he can “hand off the baton” in a way that is helpful and moves the customer forward easily toward the desired result.

 

          Having all employees prepared to answer deposit insurance questions in this manner, even without more detailed knowledge of specific coverage of various types of accounts, can be extremely important in “deposit retention.” 

 

 

          There has been too much news lately about “banks” in trouble, “banks” sold, “banks” failing, and “banks” being bailed out. Customers probably cannot tell the difference, but most of the turmoil (so far) has involved institutions that truly do not operate on a business plan similar to that of local community banks in Oklahoma.  Is there a way to help customers understand this? I don’t know.

 

          Most names in the news over the last several months have been either (1) “investment banks” calling themselves “banks” (but not operated or funded like local banks) or (2) institutions with “bank” in their name that operate closer to the traditional “savings and loan” model (with a loan portfolio heavily concentrated in 30-year home mortgages intended to be held to maturity—unlike a small-town “commercial bank” loan portfolio that may be typical in Oklahoma). 

 

          The larger institutions in the news lately have had heavy exposure to subprime mortgages or mortgages with exotic features (initial “teaser rates,” interest-only provisions for several years, reverse amortization mortgages, or payment-option ARMs.)  These “creative” mortgages helped buyers to purchase homes they really couldn’t afford—and guess what, after a while they couldn’t afford them. Banks in Oklahoma don’t have these mortgages—but maybe customers don’t believe that.

 

          The large institutions with mortgage portfolio problems are heavily exposed to the collapsing real estate markets in places like California and Florida. Those states experienced an incredible but unsustainable real estate boom, and now a “bust.”  It’s worth reminding customers that “California is not Oklahoma, and Florida is not Oklahoma.” That much is easy to grasp, because customers know Oklahoma’s economy is holding up better than most parts of the country.

 

          Many “investment banks” have been in the news this year (Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs).  The public doesn’t know what an “investment bank” is, but figures it’s a “bank.”  Until very recently, investment banks have operated on a completely different model from commercial banks, largely funding their operations by selling short-term “commercial paper” instead of taking insured customer deposits. The commercial paper market has been drying up over the last several months, causing funding problems not only for many large corporations, but also for investment banks, due to a lack of investor confidence. 

 

          Is it worth pointing out that the two biggest “bank” failures this year (IndyMac and Washington Mutual) were actually “savings and loan” charters, not “commercial banks” at all? (Maybe it’s “beating a dead horse” to try to explain to customers that commercial banks and S & Ls are sometimes different—even though they’re now all called “banks.”  Historically, S & Ls concentrated their loan portfolios very heavily in home mortgage lending. To the extent that an S & L today continues this trend, an S & L is less diversified, and may be more exposed to a downturn in “housing,” compared to a commercial bank that holds a broader range of loans.)   

 

          The most recent large resolution of a financial institution was Wachovia–a commercial bank. Wachovia’s apparent problems arose from the same sector as IndyMac and Washington Mutual. Specifically, Wachovia had a large portfolio of adjustable-rate mortgages acquired by merging with Golden West Financial (then the second largest S & L in the United States) in 2006.

 

 

          Another problem I have with news coverage over the last few months is the media’s description of FDIC insurance limits. Reporters invariably “dumb down” the message by leaving out all of the exceptions and special cases.  By doing so they cause a great deal of needless anxiety for some people who do, in fact, have their accounts properly structured to be fully insured—but who begin to doubt it, based on what news stories state.  

 

          When IndyMac Bank failed, an FDIC spokesman spoke extremely carefully to the cameras, and every word he stated about deposit insurance was precisely correct. But the network did not stop with airing his accurate statement. When he said, “Every depositor will be protected to the full limits of FDIC insurance,” a news anchor turned to an “expert,” asking, “What does that mean?” (Translate that foreign language for us.) The expert said, “Basically, every depositor is insured to $100,000.” Unfortunately, the so-called expert made no mention of the fact that additional insurance is available for joint accounts, POD accounts, trusts, retirement accounts, etc. What the FDIC spokesman said was intended to be reassuring, and did no harm. But what the “expert” said was incomplete, and for some listeners did harm.

 

          Stating that “every depositor is insured to $100,000” is a two-edged sword. On one hand, it will answer everyone who has $100,000 or less on deposit in a bank—plain and simple. But it may alarm someone to hear an “expert” say this, because the listener may think, “My bank lied when they said my account with $150,000 and two beneficiaries is insured for up to $200,000. I better move my money.”

         

          In reality, for individuals there is a lot more insurance available than $100,000. Even prior to the recent temporary increase in deposit insurance to $250,000, which expires December 31, 2009, a couple with two kids could easily structure accounts to result in total deposit insurance of $1 million, as follows (and for the temporary insurance increase, multiply 2.5 times each number to reach a total of $2,500,000): (1) Husband, sole name, $100,000, and wife, sole name, $100,000—uses up the “individual” insurance category. (2) Husband, POD to wife, $100,000, POD to Child 1, $100,000, POD to Child 2, $100,000; and wife, POD to husband, $100,000, POD to Child 1, $100,000, POD to Child 2, $100,000—uses up the “POD or revocable trust” category. (3) Husband and wife, joint tenants, $200,000—uses up the “joint coverage” category. In addition to this $1 million (or $2.5 million under the temporary insurance limits), the husband and wife each have retirement account coverage (IRA, 401(k), etc.) for up to $250,000 each. (The IRA coverage does not temporarily increase at all.)

 

          In recent weeks, various financial advisors on TV have warned people that they should move their money if they have more than $100,000 on deposit in one bank. This information is unnecessarily frightening, ignoring the fact that any individual with more than $100,000 in an account can easily restructure his deposits, at the same bank, to reach a higher insured total. (With the temporary deposit insurance increase to $250,000, it will be a lot easier to be fully insured without structuring, and this should help to cut down on the number of customers who are alarmed by lack of understanding of the insurance categories.) 

 

          The new temporary $250,000 limit will primarily help to calm the nerves of small business depositors (corporations, LLCs, partnerships) that may have more than $100,000 on deposit but have no way to structure accounts to gain higher coverage.  The temporary increase will also help banks holding public funds—until December 31, 2009—because only the amount above $250,000 will require pledging of securities.

 

          Because the deposit insurance increase is temporary (unless it is later extended), I see no need to change exiting individual accounts to combine and simplify them within the $250,000 limit. I think it might be smart to proceed as before, structuring individuals’ accounts in the same way as if the $100,000 limit still applied. That way, when the temporary increase expires at the end of 2009 (if not extended), customers will not be withdrawing their money because they are partly uninsured, and it will not be necessary to restructure accounts at that time to retain deposits.  

 

 

          Banks have an incredible “product” to sell, in the form of insured deposits (and with the temporary $250,000 insurance limit, the product has become much simpler to understand). It’s an extremely attractive product for customers who are nervous about the financial markets. The tremendous security provided by deposit insurance should be strongly promoted.

 

          In his address to the nation in September concerning the financial crisis, President Bush emphasized that during the past seventy-five years no FDIC-insured deposit has ever lost money. He added, “That will continue.” Implicitly he was indicating that even if the “worst case” occurs, the U.S. Government plans to back up the FDIC insurance fund, no matter what. 

 

          For banks’ use, the OBA has lobby signs for sale on its website with the message, “Nothing’s Safer than Money in the Bank.” The OBA is also printing some statement stuffers with this message on the front, and some simple bullet points about deposit insurance on the back. These will soon be available for purchase, in bundles of 100.

 

           Banks are no longer required to print their “Report of Condition” in the local newspaper, because this information is now available on the FDIC website. Banks can show their customers how to find it there, to reassure them.  

 

 

          Although a bank may have more than adequate liquidity at the present time, a strong emphasis on retention of existing deposits is worthwhile, both to build a “cushion” and as “ammunition” for dealing with future circumstances.  

 

          Changes in the national economy are likely to affect banks in Oklahoma sooner rather than later, although Oklahoma has fared much better than many parts of the country so far. At some point, at least some of the bank’s customers will be affected by national events, but perhaps not all in the same way or to the same degree.

 

          As one example, if the national economy weakens, at least some of the bank’s customers will have less money to deposit. A bank could retain all of its depositors but still have deposit totals that are slowly shrinking, as the national economy tightens. Therefore, even if a bank thinks it has “excess” deposits at this time, a “tighter money” scenario is possible in the future. A bank helps to prepare itself for that outcome by hanging onto existing deposit customers–even if doing that may not seem necessary now.   

 

          Looking at the “deposit retention” issue from a different angle, Oklahoma banks will almost certainly experience increased loan demand in the immediate future—and may want to prepare for it by increasing total deposits as good opportunities arise.  There will still be loan applicants whose credit quality remains acceptable—because little deterioration has occurred so far in Oklahoma’s economy. Banks that have “stockpiled” easily-available, reasonable-cost deposits will almost certainly have opportunities to use them.  

 

          Loan demand in Oklahoma may increase because lenders in other parts of the country may now be weakened, or are scaling back their operations–or perhaps cannot access the sources of funding that they have used in the past. Many out-of-state finance companies and mortgage companies have siphoned off entire segments of lending in Oklahoma in recent years—such as car loans, student loans, mortgage loans and credit cards—but now some of these lenders have reduced their total lending or geographical reach, and/or are going out of business. For example, a wide range of large finance companies (including manufacturer-owned companies) have been offering car-financing options through local car dealers, but some of this is drying up, and more buyers will turn to local banks in Oklahoma as a source of automobile financing. 

 

          As a result of the national economy, some businesses in Oklahoma may begin to experience cash-flow issues. (Both wholesalers and retailers may be affected by reduced sales or slower collections, overstocked inventory, and/or the need to meet fixed overhead costs while trying to “right-size” a business to a more sustainable level going forward.)  A bank’s existing business customers will apply for additional credit, and with liquidity the bank can assist the customers that remain financially sound.

 

          As a third example of possibly increased lending, borrowers with already-available revolving credit lines (commercial lines of credit, HELOCs, and credit cards) can be expected to draw down some of the unused portion of those credit lines as cash flow becomes tighter. Even if a bank completely stops making new loans (which won’t happen), it will still need to honor loan advances within existing customers’ pre-approved credit lines. In uncertain economic times, it’s prudent to monitor regularly (1) the amount of the bank’s unfunded commitments, (2) the rate at which those commitments are being drawn down, and (3) the continued availability of deposits (or other sources of liquidity) to meet those commitments.