My mother would have understood the implications of the Federal Deposit Insurance Corp.’s recent announcement that it is requiring U.S. banks to collectively remit advance payment of some $45 billion in future deposit insurance premiums.
As a grade-schooler, I had to clear big purchases with her, even if the cash came from my own piggy bank. “I’ll pay for it with my own money,” I’d plead when she vetoed some imprudent outlay. “It’s still all gotta come out of this one old farm,” she would reply.
Banks may write the checks for FDIC premiums, but the money really has to come out of this one old general public. The large losses the FDIC is absorbing as it closes insolvent banks eventually come out of the pockets of households and businesses that either earn slightly less interest on their deposits or pay slightly higher interest on their loans. In the long run, bank managers’ salaries won’t suffer nor will stockholders earn less in dividends.
This does not result from underhanded sharp practices by bankers. It simply is how, in a market economy, the cost of producing any product or service eventually gets incorporated into the market price.
Show this to your banker and she may protest that higher FDIC premiums, including an extraordinary levy already imposed earlier this year, do indeed affect her bank’s net income. The amounts required were substantial, and in a competitive environment, any single bank cannot immediately increase its interest spreads — the difference between interest rates paid on deposits and interest rates charged on loans — without losing business to competitors.
That is correct and is why the qualifiers “long run” and “eventually” are necessary. While no individual bank necessarily makes an immediate adjustment, over weeks or months, prevailing market interest rates, both paid and received, do adjust incrementally to cover this increased expense.
Bankers also may point out that their profits, shareholder dividends and stock prices are taking a battering right now. For all but the largest banks, bonuses and salary increases may be rare. This is all true, but it is largely the result of too many bad loans by banks generally and not by higher FDIC premiums.
Once again, a weasel word — “generally”— is important. In bank failure crises like the current one, the innocent are forced to pay for the sins of the guilty. Banks that lent prudently as asset bubbles inflated apace have to pay higher assessments just like the ones that were reckless. And they will have to do it for years to come.
Yes, most banks have higher-than-normal loan losses right now. But that does not mean that all were reckless. Some loans in default now were very prudent when made and would have been repaid if the economy had continued to grow, even modestly, and unemployment had remained below 5 percent or even gone to 6 percent.
Households that never failed to repay a cent in the past may default when key earners are unemployed for extended periods. Even well-managed businesses may default if they are recent startups, undercapitalized or simply produce a product the demand for which is highly driven by people’s incomes and expectations of the future economy.
But while all banks will be writing bigger checks to the FDIC right now and probably over the next decade, in the long run, the money still has to come out of the poor old general public.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.