I wanted to take a look at the recent communication between the FDIC and the banking community, where the FDIC asserted that “Recent experience demonstrates that newly insured institutions pose an elevated risk to the Deposit Insurance Fund, particularly during an economic downturn.”
They added that the banks or financial institutions that had to have their deposits covered by the Deposit Insurance Fund were those banks that had been operational for under seven years, with the majority having been around for between four and seven years when they failed.
In response the FDIC says they will now supervise them with heightened scrutiny to look for characteristics which caused the downfall of many banks during the last couple of years. Part of that will entail adding an additional four-year period to the scrutiny, up from the usual three years prior to the existing crisis.
What I mean by that is many of the huge banks had failed, or rather, would have failed if the government hadn’t used taxpayer funds to bail them out. So even if the numbers of banks that were around for less years are larger, that’s obviously irrelevant, as the larger banks represented so many more billions than the smaller banks, thus they are the ones who have caused the problems; but the FDIC is evidently attempting to make the public forget that, otherwise the communication they made doesn’t make any sense.
The smaller banks are depleting the fund because the larger banks were given billions upon billions to ensure they weren’t the ones that depleted the fund. So to make it look like smaller banks are the major problem because they weren’t offered bailout funds is incredulous.
I’m not saying this isn’t happening with the smaller banks, what I’m saying is the assertion is based upon the actions of the government to bailout the huge banks, creating the current situation, which is attempting to made to look like big banks, which have been around for decades, were more stable. The reality is the only reason the small banks are failing in larger numbers is there are more of them, first of all, and they weren’t considered for bailout funds. They were in no worse shape than the larger banks, but were left out in the cold as far as taxpayer money being used to bail them out is concerned.
The problem I see here is the intense and elongated scrutiny by the FDIC could cause the smaller banks to be even less competitive, giving the larger banks a competitive advantage they don’t need at this time, or any time in the future.
For example, let’s look at J.P. Morgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C). According to federal statistics, these four banks now account for 50 percent of all new mortgages and close to 66 percent of all credit cards issued. As far as deposits go, each one of these giants, with the exception of Citigroup, has over 10 percent of the nation’s deposits.
This isn’t healthy for the banking or financial industry, and they are now encouraged by the foolishness of the Obama Administration and lawmakers through bailing them out, to grow and profit at the expense of smaller banks, who didn’t have the luxury of bailout money, while knowing they will continue to be “too big to fail,” as they continue to grow even bigger. This is why the government shouldn’t be involved in the private industry.
The point in all of this is the FDIC is disingenuously blaming small banks for the depletion of the Deposit Insurance Fund, when in reality the only reason they’re the ones depleting it is the larger banks were artificially propped up so the Deposit Insurance Fund wouldn’t be emptied by one huge failure, let alone the many large banks that would have failed.
So the idea that the smaller banks will remain under intense scrutiny and tighter regulation misses the point that it really was the size and practices of the larger banks which caused most of the problems, and attempting to move the focus off of them and blame smaller banks is dishonest at best.
Already, with less competition, the big banks are increasing fees and offering fewer choices for consumers. They are also able to borrow at lower rates than their smaller competitors, not because they’re more credit-worthy, but because creditors now view them as being better credit risks; not because of better management, but because the they now know by the actions of the government that they will not be allowed to fail. This is wrong, but there it is.
So while we hear about the “tight rein” the government is keeping on the banks they bailed out with our money, this is mostly a smokescreen to hide the consequences of those actions, which we will pay for for decades, and the inevitable inflation that will come from it will devastate even more Americans.
In light of that, the idea that small banks are the problem for the Deposit Insurance Fund misses the real issue, which was none of this should have been done in the first place, and we’ll never know if the assertion by the government that they “saved” the economy is true, as it was never truly tested because of the bailouts.
What we do know is the amount of money used to prop up the big banks will come back to haunt us through the hidden tax of inflation, which is the least recognized and understood by the general public, and which the government has been able to get away with for a long time for that reason.
So in the end, the actions and recent communications by the FDIC to bankers concerning smaller, charter banks opening and being scrutinized more intensely and longer, while sounding good, is really another case where it could do more harm than good. The big banks and their growing market share are the real problem, and the interference of the government in the private sector has now caused them to enlarge and know they can get away with the types of practices that led us to this situation in the first place.
