The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘FDIC

Bank deposits – the hidden risk associated with government guaranteed deposits

The focus on bank financial strength is generally on the lending side of the business and the potential for bad debts.  Here is another view, and something that drives some banks to make ever riskier loans to produce enough revenue to pay for their deposits.

For Banks, Wads of Cash and Loads of Trouble | NY Times

The 79 banks that have failed in the United States over the last two years had an average load of brokered deposits four times the national norm

But the hot money also came with a high cost. To lure the money from brokers, banks typically had to offer unusually high rates. That, in turn, often led them to make ever riskier loans, leaving them vulnerable when the economy collapsed. Magnet failed early this year and Security Bank is barely hanging on.

When we assess leverage it is not just the quality of the assets, it is also the cost of the liabilities, which is what deposits are to banks – liabilities with an associated cost.

It is ironic that those deposits that banks are gathering across the US from other than their home state at high rates, are also FDIC insured.  So the US taxpayer has been passively promoting banks to take undue risks by gathering high cost insured deposits to fund their mortgage and loan growth.

This is just another element to take into account for The Great Unwinding of leverage in the financial system.  The deleveraging that takes place will result in smaller institutions, and much less value attributed to deposits in cash, due simply to a supply that far outstrips demand. The outcome will depend on whether the regulators institute limits on FDIC insurance, limits on brokerage or some hybrid of those.

Relevance to Bankwatch:

One more blow against the old system.  A banking business model based purely on arbritrage on interest is not viable, and highly susceptible to risk associated with leverage.  This leads to two conclusions:

  1. Regulation: The unintended consequences of regulation such as deposit insurance are complex, and need to be considered by the regulators.  Those unintended consequences could be more expensive in the long run through higher taxes, than the immediate apparent benefit.
  2. Bank models: Banks have historicaly been arbiters of money between lenders and borrowers.  Non Interest revenue from fees has been long considerd considered icing on the cake from interest revenue – essential icing, but nonetheless icing.  The new world is smaller and requires efficiency.  What if a banking model were built on fee revenue first?  This would require products and services that are seen as valuable by consumers, and it would drive different approaches than investment in expensive branches, ATM networks, and staff.

PS:  To provide a sense of scale of the problem, a back of the envelope calculation on some Canadian banks where I have an idea about the customer and staff numbers produces a customer to employee ratio of 150:1.  A similar cacluation on core banking (primary chequing with that bank) customers to employee ratio brings an incredible 50:1.  This hardly suggests that the investments in technology, branches and infrastructure over all the years has been effective.  Banks efficiency has been hidden from view by the growth in the financial system.  Much more to come on this.

Written by Colin Henderson

July 4, 2009 at 22:20

FDIC aggregate bank losses masked by trading gains Q1 – 2009

The latest FDIC QBP is out and contains some sobering information on the impact of the recession on bank results.

FDIC Quarterly Banking Performance – 31st March 2009


  • Net Income of $7.6 Billion Is Less than Half Year-Earlier Level (61% less than previous period)
  • Noninterest Income Registers Strong Rebound at Large Banks
  • Aggressive Reserve Building Trails Growth in Troubled Loans
  • Industry Assets Contract by $302 Billion
  • Total Equity Capital Increases by $82.1 Billion

Looking behind the apparently positive net income of $7.6Bn we see that first quarter earnings were $11.7 billion (60.8 percent) lower than in the first quarter of 2008 but represented an apparently significant recovery from the $36.9 billion net loss the industry reported in the fourth quarter of 2008, however it included significant trading gains of $9.5 Bn which masked the continuing loan loss problems. Aggregate net income would have been in loss territory based on the business fundamentals.

While at first glance some recovery appears underway, the above along with industry asset contraction, reflecting pay-offs and write downs, suggests we are not close to being out of the woods on the banking sector.

I also note that the level of derivatives is has now increased in 2009 versus 2008, despite earlier commentary that derivatives were being unwound.  (Derivatives represent off balance sheet liabilities)

Written by Colin Henderson

May 27, 2009 at 11:34

Posted in US

Tagged with , , ,

FDIC Quarterly Banking Profile offers some insight to banks’ status

As we await the results of the Federal Reserve Stress tests, the FDIC quarterly tells us much of what to expect.  This report is a roll up of all banks in the US, and it provides some interesting stats.  The numbers are broadly negative over the periods since 2002, and since last year.  Banks are highly levered, and at their most levered for the duration of the reporting periods back to 2002.


The Quarterly Banking Profile is a quarterly publication that provides the earliest comprehensive summary of financial results for all FDIC-insured institutions.

  • Capital – $ 1.3 Tn
  • Loans  – $ 7.9 Tn
  • Leverage – 7.49% (worst since 2002)
  • # of banks 8,305 – note, only down 1,000 since 2002

The FT sums up the report, noting that we don’t have to await the stress test to realise the outcomes.  There will be some blood on the table before this exercise is over, and it will continue to keep banks eyes off customer and service development.

The banking system is severely undercapitalized, with numerous insolvent banks. Clearly a more robust banking system requires far more capital and a robust loan loss reserve adding to the capital cushion. Until the trillion plus of impaired assets are removed and the banking system is recapitalized, credit flows will be restricted. In this context, it is puzzling why the administration is tinkering at the fringes with programs designed to enrich Wall Street. Geithner and Summers need to address the banking problems square-on.

Written by Colin Henderson

April 13, 2009 at 23:30

Posted in Uncategorized

Tagged with ,

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