Local banks take some steps to try to reassure nervous depositors.
People nervously watch the collapse of financial institutions. Should banks be reassuring the public?
“I think there’s a lot of fear out there,” Stan Wilmoth said.
The Heritage Bank president is concerned about the shaken faith of people in the financial system after repeated poundings it has taken—the subprime mortgage collapse, Bear Stearns, Fannie Mae and Freddie Mac, IndyMac.
It is regarded by economists as a truism that public confidence is an essential component of a national economy generally and of financial institutions in particular.
So it’s reason for concern that the public has been hearing terms that seemed to have died out a couple of generations ago, such as “a run on the bank.”
For most people, the closest they ever got to a bank run was It’s a Wonderful Life. “What’s a Bank Run?” was the title of a Slate article last week. But now, the newspapers are full of such reports. IndyMac’s July 11 failure was the 32nd U.S. bank failure since 2000 and the fifth one this year—but is bigger than the other 31 combined, according to the Federal Deposit Insurance Corporation (FDIC).
Little wonder the public is anxious. Do banks have a responsibility to do public outreach and education to try to reassure the public or is that the government’s job?
The question takes on enhanced importance in a few states where there are a large number of foreclosures or short sales (a home sale in which the lender agrees to accept less than the borrower owes on the mortgage). Nevada is at the top of that list.
Veteran banker Dave Funk of Nevada Security Bank in Reno said, “We’ve been calling customers to reassure them that deposits are OK, the bank is in good financial condition, etcetera. … We’re just taking a pro-active stance to call people and talk to them and field questions from them regarding any concern that they might have.”
But there is no general public education effort, either jointly or as individual institutions.
“I think each of us individually do that with our own clientele,” Funk said. “I mean, we don’t do that as a general pool. We all do that as individual banks.”
There is a reliance on the federal government to make it clear that the overall financial health of the industry is sound, and the FDIC has done that. FDIC chair Sheila Bair went on a CBS morning program and NPR to assure people their bank deposits are “overwhelmingly” safe. She said that even if a bank failed, a customer might not notice the difference because steps will be taken immediately to keep the bank operating while things are sorted out by regulators.
“If your bank fails—and it’s extremely remote that your bank will fail—it will be business as usual,” she said. “It will really be a non-event.”
Bair said the FDIC received 17,000 calls of concern from bank customers in a single day.
Funk, however, believes that the public is not really all that nervous or concerned—even with headlines like “How safe is your money” and “Can consumers trust their banks” appearing regularly.
“I read it that there may be a little bit of a concern, but not a lot,” he said. “I mean, there’s the negative publicity that’s come out by the press and everybody about these kinds of things. [But] I know the FDIC, our examiners, for example … they’ve put out articles that the majority of the community banks are safe and sound. I’ve fielded some calls here, there’s no question about that, but it’s not as if my phone’s ringing off the wall, either.”
UNR economist Glen Atkinson says there are hazards to doing public education. For one thing, banks and banking organizations don’t necessarily have access to information they need to vouch for the overall health of their industry, information that is closely held by the FDIC.
He said he heard an NPR interview with an FDIC official who said the agency has a list of banks that are at risk, but will not release it.
“What if the [Nevada] bankers association here released this reassuring, ‘Don’t worry, don’t worry'—and then the next day a bank crashes?”
Nevada Bankers Association president Bill Uffelman said, “We are looking at safety and soundness ads [and] need to develop a budget. I have done several interviews on safety and soundness as have some of the bankers. Many banks have participated in the mortgage foreclosure outreach programs.”
Wilmoth, whose bank has put out stacks of booklets explaining federal deposit insurance, said he thinks it’s important to do a better job of explaining existing protections. A lot of people seem to believe that FDIC protection starts and ends with the familiar $100,000 in deposit insurance, he said. In fact, that’s just where it begins, and he tries to get that word out.
“I think there’s a misunderstanding, really, of the FDIC insurance, though,” he said. “That’s more concerning to me than anything because, for instance, if you have a joint account, you and your wife both have $100,000 insurance. If you have a trust account with three children, depending on how it’s worded, you could have as much as $800,000.”
The way those things are not fully explained can be seen in George Bush’s news conference on July 15, when Bush said, “Now, if you’re a commercial bank in America and your deposit—and you have a deposit in a commercial bank in America, your deposit is insured by the federal government up to $100,000. And so, therefore, when you hear nervousness about your bank, you know, people start talking about how nervous they are about your bank’s condition—the depositor must understand that the federal government through the FDIC stands behind the deposit up to $100,000.”
Most banks were never involved in the kind of dubious mortgages that caused the subprime mortgage collapse, but they are having to deal with the effects of it. Wilmoth believes that the economy was subject to too many negative pressures, not just the failings of financial institutions.
“The economy just couldn’t take the financial problems at the same time they were getting hit by the gas and fuel” price spikes, Wilmoth said.
All the bad news is not yet astern. Wilmoth does not believe the public has yet made the connection between rising petroleum prices and heating costs in the coming winter and will be jolted when they start getting the bills. But he is certain that improvements are coming, even if there is occasional bad news. He tends to believe that 2009, when the presidential election is past and the housing market has begun to shake out more thoroughly, will be a lot less scary than today is.
“I can assure you that it will settle down eventually because a free economy always does. The timing is the thing.”