Too Big to Fail Made Easy
The best and simplest explanation of the concept of a bank or savings and loan being too big to fail that I have found comes from the Federal Reserve Bank of Cleveland. It can be found on the Economix blog at [ http://economix.blogs.nytimes.com/2009/08/20/defining-too-big-to-fail/?dbk ].
Yes, I know that I should learn to embed links in my blog. I’m not the most technically astute individual and I am waiting for my son to show me how to do this. This is one of things children are supposed to do; help their technologically backward parents.
Be well and stay happy.
Saturday, August 29, 2009
Closing Banks
Closing Banks
The FDIC is closing banks at a faster rate than in a very long time. Georgia probably has seen more banks close at any time since Billy Sherman took his walk from Atlanta to Savannah in 1864.
The FDIC’s list of problem or troubled institutions is now at 305. At least, it was at 305 when the list came out earlier this month but that was for the period ending March 31st. The total number of institutions on the list could have dropped 301 with last Friday’s closings or it could have gone higher as well.
Should this matter to me if I have less than the deposit insurance limit on deposit in a bank?
Simple answer is yes.
As banks close, consumer and business choices for financial institution service providers decline. Economics will tell you that users of a particular service benefit when there is vigorous competition.
After a closure and sale, the initial condition is relatively unchanged. The new, acquiring bank needs tellers and new accounts staffers to handle the routine transactions. It is simpler to use the staff on site than to go out and recruit a completely new staff.
Decision makers, like managers and loan officers, will be among the first to leave, usually within the week after the closure. They stay around long enough to complete a turnover process so some new decision maker. The new decision maker doesn’t know you, doesn’t know about your business, doesn’t know about plans, and doesn’t know about the local community, in many cases, will be responsible for you and your account.
This change affects the business customer more than anyone else.
This process is occasionally referred to relationship rebuilding.
It can be a long and painful process.
The new bank may suspend or curtail any borrowing arrangement you have. Alternatively, it may not renew the borrowing arrangement on the same terms as before, remember, it doesn’t know you. The new bank may require considerably more documentation and paperwork than before.
For many consumers, these may not be significant burdens. Consumers can always change institutions since most banks tend to avoid dealing with consumers or use a non-personal delivery method. Consumers have become accustomed to indifferent service. Most consumers have very little, if any, loyalty to any one bank or savings and loan.
Yes, I know changing automatic deposits and billings can be a problem. Changing these transactions is like going on a walk and have a small pebble fall into your shoe. You can either stop for a few minutes and remove the pebble or continue to endure the discomfort as you walk with the pebble in your shoe.
Most consumers will sit down and take the pebble out so they have less discomfort in their lives.
Remember the FDIC list of problem banks?
This is a list of banks that are more likely than not to either close or be merged with another, larger institution in the near future.
Even so, one should not be alarmed unless you live in a small town with only one bank. Setting that issue aside for a moment, one has to remember that there are about 8,200 federally insured banks and savings and loans in the country as of March 31st. That means you still may have a choice.
I’ll have some ideas and thoughts on what a small business person might want to do to insulate him or herself from potential trouble in a couple of days.
Be well and stay happy.
The FDIC is closing banks at a faster rate than in a very long time. Georgia probably has seen more banks close at any time since Billy Sherman took his walk from Atlanta to Savannah in 1864.
The FDIC’s list of problem or troubled institutions is now at 305. At least, it was at 305 when the list came out earlier this month but that was for the period ending March 31st. The total number of institutions on the list could have dropped 301 with last Friday’s closings or it could have gone higher as well.
Should this matter to me if I have less than the deposit insurance limit on deposit in a bank?
Simple answer is yes.
As banks close, consumer and business choices for financial institution service providers decline. Economics will tell you that users of a particular service benefit when there is vigorous competition.
After a closure and sale, the initial condition is relatively unchanged. The new, acquiring bank needs tellers and new accounts staffers to handle the routine transactions. It is simpler to use the staff on site than to go out and recruit a completely new staff.
Decision makers, like managers and loan officers, will be among the first to leave, usually within the week after the closure. They stay around long enough to complete a turnover process so some new decision maker. The new decision maker doesn’t know you, doesn’t know about your business, doesn’t know about plans, and doesn’t know about the local community, in many cases, will be responsible for you and your account.
This change affects the business customer more than anyone else.
This process is occasionally referred to relationship rebuilding.
It can be a long and painful process.
The new bank may suspend or curtail any borrowing arrangement you have. Alternatively, it may not renew the borrowing arrangement on the same terms as before, remember, it doesn’t know you. The new bank may require considerably more documentation and paperwork than before.
For many consumers, these may not be significant burdens. Consumers can always change institutions since most banks tend to avoid dealing with consumers or use a non-personal delivery method. Consumers have become accustomed to indifferent service. Most consumers have very little, if any, loyalty to any one bank or savings and loan.
Yes, I know changing automatic deposits and billings can be a problem. Changing these transactions is like going on a walk and have a small pebble fall into your shoe. You can either stop for a few minutes and remove the pebble or continue to endure the discomfort as you walk with the pebble in your shoe.
Most consumers will sit down and take the pebble out so they have less discomfort in their lives.
Remember the FDIC list of problem banks?
This is a list of banks that are more likely than not to either close or be merged with another, larger institution in the near future.
Even so, one should not be alarmed unless you live in a small town with only one bank. Setting that issue aside for a moment, one has to remember that there are about 8,200 federally insured banks and savings and loans in the country as of March 31st. That means you still may have a choice.
I’ll have some ideas and thoughts on what a small business person might want to do to insulate him or herself from potential trouble in a couple of days.
Be well and stay happy.
Sunday, August 9, 2009
Closing Consumer Credit Card Limits
Closing Consumer Credit Card Limits
This is a concept that fascinates me. Some banks are closing credit card limits for seemingly no apparent reason other than they want to do so before the federal laws change next year. It looks like a last ditch attempt to do things that the legislation will prohibit.
Full and fair disclosure: I had two credit card accounts that had their limits reduced by JPMorgan Chase Bank from USD$15,000 to USD$500. It is true that I had not used the credit cards in years. Like many older Americans, I liked to carry them for sentimental reasons. The old Chase Manhattan Bank helped my parents get inheritance money out of Great Britain in 1940 at the start of World War II.
A small limit like that is not going too much for me if I want to make a purchase of any consequence. I could purchase a bunch of DVDs or even some Blu-Ray DVDs at DVDPlanet.com. $500 would about cover dinner for my son and me and maybe our friends who are female at Morton’s the Steakhouse.
My point is this; how likely am I to do any business with JPMorgan Chase Bank in the foreseeable future?
I think the chances are very slim to less than zero that I will.
I wonder how other Americans like me were treated to, for all intents, the closure of their credit card accounts. I would be willing to bet that a great number of them will never do business with the bank or financial institution that unilaterally reduced their credit limits without reasonable cause.
Most of them are or were profitable customers.
I have very good credit and have had very good credit for years. I am customer that I loved to have when I managed a credit card portfolio. I carried a balance from time to time but not an excessive balance. I paid more than the minimum payment each month and I made sure the payments were timely.
In other words, I was a very profitable customer.
Profits, as you know, are important for any business and banks are no different. Profits help build capital in a financial institution. Consumers tend to be among the more profitable business segments that a bank has. They are not usually sensitive to interest rate changes.
I don’t think there have been any bank fail because their consumer loan business was crummy. I could be wrong because so many banks have failed and will fail in the coming months. The most recent bank failures in Southern California were attributed to failed loans in the commercial real estate market.
I read in the New York Times Deal Book this past week the Federal Reserve reported a USD$10 billion drop I consumer credit outstanding. This was the fifth consecutive month for a decline in outstanding consumer credit.
Fascinating actually.
I think one could reasonably conclude that American consumers were truly cutting back on the use of credit. If this happens, as the New York Times pointed, the current recession will last longer because consumer spending is roughly 70% of Gross Domestic Product.
I have been cutting back on my credit balances and I have put off expensive purchases that no longer seem to make any sense to me. For example, I thought about getting in on the cash for clunkers program but decided to keep my clunker because it is paid for and I have only driven it for less than 90,000 in fourteen years. Having money in the credit union or the bank is a very nice feeling for me.
With American consumers cutting back on their use of credit, this will reduce bank earnings. Less debt means less interest paid to the banks.
Banks and other financial institutions have competed very strongly with each other for commercial real estate loans in the last five or six years. Competition is very good for borrowers because they are able to borrow at a lower cost. Thin margins, caused by very competitively priced commercial real estate loans, meant there was not much money going into the institution’s profits.
I will admit there is some logic to the banks’ actions. Decreasing the amount of available credit reduces the banks’ contingent liability to fund these future advances. This helps to improve their balance sheets, something the regulators have been pushing at for some time now.
Be well and stay happy.
This is a concept that fascinates me. Some banks are closing credit card limits for seemingly no apparent reason other than they want to do so before the federal laws change next year. It looks like a last ditch attempt to do things that the legislation will prohibit.
Full and fair disclosure: I had two credit card accounts that had their limits reduced by JPMorgan Chase Bank from USD$15,000 to USD$500. It is true that I had not used the credit cards in years. Like many older Americans, I liked to carry them for sentimental reasons. The old Chase Manhattan Bank helped my parents get inheritance money out of Great Britain in 1940 at the start of World War II.
A small limit like that is not going too much for me if I want to make a purchase of any consequence. I could purchase a bunch of DVDs or even some Blu-Ray DVDs at DVDPlanet.com. $500 would about cover dinner for my son and me and maybe our friends who are female at Morton’s the Steakhouse.
My point is this; how likely am I to do any business with JPMorgan Chase Bank in the foreseeable future?
I think the chances are very slim to less than zero that I will.
I wonder how other Americans like me were treated to, for all intents, the closure of their credit card accounts. I would be willing to bet that a great number of them will never do business with the bank or financial institution that unilaterally reduced their credit limits without reasonable cause.
Most of them are or were profitable customers.
I have very good credit and have had very good credit for years. I am customer that I loved to have when I managed a credit card portfolio. I carried a balance from time to time but not an excessive balance. I paid more than the minimum payment each month and I made sure the payments were timely.
In other words, I was a very profitable customer.
Profits, as you know, are important for any business and banks are no different. Profits help build capital in a financial institution. Consumers tend to be among the more profitable business segments that a bank has. They are not usually sensitive to interest rate changes.
I don’t think there have been any bank fail because their consumer loan business was crummy. I could be wrong because so many banks have failed and will fail in the coming months. The most recent bank failures in Southern California were attributed to failed loans in the commercial real estate market.
I read in the New York Times Deal Book this past week the Federal Reserve reported a USD$10 billion drop I consumer credit outstanding. This was the fifth consecutive month for a decline in outstanding consumer credit.
Fascinating actually.
I think one could reasonably conclude that American consumers were truly cutting back on the use of credit. If this happens, as the New York Times pointed, the current recession will last longer because consumer spending is roughly 70% of Gross Domestic Product.
I have been cutting back on my credit balances and I have put off expensive purchases that no longer seem to make any sense to me. For example, I thought about getting in on the cash for clunkers program but decided to keep my clunker because it is paid for and I have only driven it for less than 90,000 in fourteen years. Having money in the credit union or the bank is a very nice feeling for me.
With American consumers cutting back on their use of credit, this will reduce bank earnings. Less debt means less interest paid to the banks.
Banks and other financial institutions have competed very strongly with each other for commercial real estate loans in the last five or six years. Competition is very good for borrowers because they are able to borrow at a lower cost. Thin margins, caused by very competitively priced commercial real estate loans, meant there was not much money going into the institution’s profits.
I will admit there is some logic to the banks’ actions. Decreasing the amount of available credit reduces the banks’ contingent liability to fund these future advances. This helps to improve their balance sheets, something the regulators have been pushing at for some time now.
Be well and stay happy.
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