The Economic Minute: The changing state of banking

Hope Berman Levin, the regional president for U.S. Bank in Arizona, recently touched on some of the rapid-fire changes that are happening in banking, during a talk at the W. P. Carey School's 26th Annual  Dean's Council of 100 Executive of the Year Luncheon. Levin commented on new policies at the FDIC, interest rates, bank failures and the future of the industry. The Economic Minute, presented at Economic Club of Phoenix luncheons, brings you the insights of the school's economists and the business leaders who are members of the Economic Club of Phoenix and the Dean's Council of 100.

Introduction: Hope Berman Levin, the regional president for U.S. Bank in Arizona, recently touched on some of the rapid-fire changes that are happening in banking, during a talk at the W. P. Carey School's 26th Annual Dean's Council of 100 Executive of the Year Luncheon.

Levin commented on new policies at the FDIC, interest rates, bank failures and the future of the industry. The Economic Minute, presented at Economic Club of Phoenix luncheons, brings you the insights of the school's economists and the business leaders who are members of the Economic Club of Phoenix and the Dean's Council of 100.

Tanscript:

Hope Berman Levin: Thank you and good morning. Thank you for inviting me here to speak and I'm looking forward to honoring our executive of the year. For a few brief moments, I've been asked to talk about banking. Now, if this were Banking 101, within the time that I've already introduced myself, the curriculum would be outdated. So, there aren't many books being written on banking today, as we can all understand.

And it's changing, I'm sure. During the course of our lunch here, we'll hear even something different that's come out. But, in my few, brief moments — so that we can fully enjoy what an economic luncheon like this can bring us in great speakers — I'll share a few of my personal comments as it relates to the FDIC, interest rates, bank failures, and lastly, the future. Let's look at the FDIC. The safety and soundness of banks has been leveled; we're all on the same playing field right now if we look to the FDIC.

The FDIC insurance increased to $250,000 per account holder if you're earning interest in an account. And most recently the banks who've chosen to participate in the Transaction Account Guarantee Program are offering you unlimited insurance from the FDIC as long as your account is not interest-bearing. That is important to many businesses here today.

Many of you, I know, were scurrying at the end of last year, trying to figure out how you were going to divide your funds up amongst multiple banks, and business doesn't get done efficiently that way. Those programs are scheduled to expire over the weekend. We should anticipate that we won't go back to the $100,000 level, but we're just not sure where that will end up. It depends on how you do the math. So will see something, if not the $250,000 retained.

But, one of the defining things that I remembered from my economics professor was there's no such thing as a free lunch. And businesses should expect to see the costs that are being passed along to the banks for that FDIC insurance and guarantees, and if you are a business owner here, you'll start seeing that in early April, and for certain by May for most of the institutions that are being charged these additional fees.

More important than the deposit side is the interest expense side to many of the borrowers. Interest rates right now are certainly a function of supply and demand. There are fewer sources than ever to borrow. Not only do we feel that capital is tight, but there are fewer opportunities to find that capital. There's been a dramatic fall-off of sources of capital. And what I'm finding is that everyone is retreating back to their friendly banker. You might not think we're so friendly right now, but we are one of the few sources that still have capital.

But, at the same time as people are coming back to the banks, the banks are finding that our sources of capital have decreased exponentially. It is more expensive for the banks to go out into the market and raise funds, and in doing so right now, many of those funds are being raised with government backing. That has added fees in addition to just what the market will bear for a bond that Wells Fargo or another bank is willing to purchase.

And as such, borrowers are now going to see higher interest rates in their borrowing. If you're in the middle of your line-of-credit renewal period, your banker has something called a yield. And I see some heads shaking out there. Those of you who are used to seeing LIBOR plus 100 and brag about prime rate at the country club, you should start hearing LIBOR plus 300 or LIBOR plus 350, and don't be shocked when you do.

The cost of capital may be helped by actions that are being taken daily. Just Monday, the Secretary of the Treasury, Tim Geithner, came out and announced a new public-private partnership that will take advantage of a billion dollars of the TARP original allocation of funds. That would pair public and private partnerships to purchase the toxic assets that are on the balance sheets of various banks. That should open up capital as well.

And hopefully when there's more capital flow, we'll see rates drop from that. The other topic I mentioned was bank failures. Where are we today? And if you're a geek enough to keep track of it, there have been 45 failures since the start of 2008 - 20 of those have happened this year in 2009. For most failed banks, if you follow it, they were successfully taken over by another financial institution who will takeover all of the deposits, whether insured or uninsured.

And that's part of picking and choosing between leverage that they wish to keep. But, interestingly in the last week, many of the failures have been happening in Georgia. The First City Bank in Georgia was one of those institutions where the FDIC was unable to find an interested bank to takeover. The second thing that is unique about that is that particular financial institution had too many brokered deposits, or [inaudible] deposits, in their financial institution.

And what that means to you if you were a depositor, you probably loved getting 3 percent or maybe 4 percent interest on your CDs from First City Georgia, but if you were over the $250,000 at this point, you're unsure, because no one has stepped up for that. So, my advice is to pay attention to where you have your funds. Make sure that if you are interest-bearing right now that you know your position at that bank.

There have been Arizona charter banks that have been taken over by the FDIC in this year-and-a-half span. And to put it into some perspective, in 1991, the FDIC acknowledged that there 1430 banks on their problem bank list. Today, that number is at about 250. The first quarter may bump that up, but the FDIC will only tell us what are problem banks. They don't tell us the scale or the depth of the problems. But, I think it's fair to praise President Obama, who was on Jay Leno last week.

He told us there was no need to put our money under our mattresses, and I absolutely agree with that. The last topic in this economic community is the future. As I stand here and look out to this audience, we're all surrounded by ASU professors, who I happen to think are far better at predicting and forecasting than I could ever be. We all know that we're getting all of the economic news here in nanosecond soundbites, and every one of those soundbites moves the market one way or the other.

The optimists are prone to remember that Rome wasn't built in a day, and truly this economy won't be righted in a day. But, it will actually be righted in time. I think another 500 day on Wall Street would do us all very good. So, I appreciate this opportunity to have spoken to you during these few moments. I'm told that the Dow did increase during the few minutes I spoke, so perhaps I should take that as a positive impact on our economy.