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Bringing down the banks
The Occupy Wall Street protests have started a national conversation about how capitalism should work – or if it can work at all. But for all the talk about the problems with our financial system, it seems like few workable solutions have emerged. After several large bank bailouts, many people feel powerless. But others are taking action to get that power back.
CHARLIE MINTZ: Can you tell me what you’re doing?
UNIDENTIFIED MAN: I'm painting a giant foreclosure sign that we're going to be putting up on the big banks throughout San Francisco to symbolically close them. Move your money.
KALW’s Charlie Mintz recently talked with some San Franciscans about this very issue. Mintz was in Justin Herman Plaza on November 5 – what was called “Bank Transfer Day,” an online campaign to remove money from corporate banks and open accounts at credit unions.
UNIDENTIFIED MAN: I did it yesterday. My sense of the influence of money in government and power, and all the issues of who is controlling the means.
According to a survey by the Credit Union National Association, 650,000 people moved their money in the four weeks leading up to Bank Transfer Day, moving an estimated four-and-a-half billion dollars. The American Bankers Association contests those figures, and no one will know for sure until official numbers are released in February. But there’s no doubt many people are making the switch.
UNIDENTIFIED MAN: Jesus kicked the moneylenders out of the temple for doing what our banks do. And he wasn't particularly peaceful about it. As I like to say, we are being more peaceful than Jesus. We need to get bankers the hell out of running our country.
So what will the impact of this exodus be? Charlie Mintz has some answers.
CHARLIE MINTZ: To understand the impact of Bank Transfer Day, you need to know some things about banks, and you need to know some things about credit unions. So I talked to someone who knows about both.
DARREL DUFFIE: My name is Darrell Duffie.
Duffie’s a professor of economics at Stanford, and he can tell us a lot about the big banks.
DUFFIE: They are darned big...
DUFFIE: They can be up to 2 trillion or so of loans in their portfolio, which is enormous.
All together the four largest banks – Wells Fargo, JP Morgan Chase, CitiBank, and Bank of America – have about seven trillion dollars in loans on their balance sheet. That’s roughly half the size of the national GDP.
Now let's compare that to the size of credit unions.
DUFFIE: Well, credit unions are essentially small banks that have a limited set of things that they do.
Because they're non-profit, credit unions are exempt from income taxes. Banks argue that gives them an unfair competitive advantage. So In response, Congress has limited the amount credit unions can lend out, to just 12.5% of their assets.
DUFFIE: More or less they're limited to simple retail deposit taking: loans for homes, cars and small businesses.
Banks have no such requirement. They can lend out as much as they want, provided they keep 10% of their deposits on reserve. So in theory, they can keep growing indefinitely. Meanwhile, the credit unions’ loan cap keeps them small – and makes it harder for them to hold their own.
JAMES KAHN: What we have in the U.S. is kind of a two-tiered system where we have a number of very large banks…
That's James Kahn, a Professor of Economics at Yeshiva University in New York.
KAHN: The large banks have been getting bigger, and the small banks have been disappearing or getting absorbed into larger institutions.
Kahn’s talking small, for-profit banks, but the same thing can happen to credit unions. Our four biggest banks hold more than four trillion dollars in deposits. That’s 44% of all the deposits in the country.
Meanwhile, the 7,400 credit unions? They’ve got around than $1 trillion in deposits – less than 10% of the country’s deposits. So even when people move about five billion dollars out of big banks and into credit unions, Stanford's Darrel Duffie says it probably doesn’t much matter.
DUFFIE: Five billion dollars is an enormous amount of money for you or me, but for the large banks, it's not something they would like to see happen, it's not going to take them down.
This isn't just Duffie's opinion – every economist I spoke with was in agreement on this issue. The big banks just control too much of the country's total deposits.
KAHN: The too big to fail is still an issue.
Economist James Kahn says, even a few million people moving their money wouldn't make much of a difference.
KAHN: That's gonna require more of a political solution.
So deposits – especially relatively small ones – aren't really that important to these banks. In fact, they might not even want them.
DUFFIE: It happens we're at a time right now when the large banks actually don't have as much benefit as they did in the past of having a lot of deposits because they're flush with cash.
Banks are flush with cash for two reasons. One is that the federal government stepped in big time during the 2008 financial crisis. The Troubled Asset Relief Program, known as TARP, basically bought bad assets directly from the banks, to the tune of around $700 billion.
On top of that, the Federal Reserve pumped trillions of additional dollars into the banks. This helped them stay in business, but it didn’t do anything for their second problem: lack of demand.
KAHN: The money’s just sitting there.
James Kahn says banks used to earn profits by paying a certain amount to borrow money from customers, then loaning it back out at higher interest rates.
KAHN: In the boom years of the ‘90s or even first years of last decade the money was going out as fast as it came in.
Two factors have dried up loans. One, the recession has meant businesses are asking for fewer loans. Two, after days of easy lending leading up to the financial crisis, banks are being stricter with who they loan money to, so since they're no longer using those deposits, the big banks are okay letting small customers go.
KAHN: For smaller deposits, the larger institutions don't even care that much, because they tend to make more money on the larger deposits anyway. It's kind of win-win because the larger institutions don't really value them that much.
A win-win – except for one wrinkle. While it's true that small deposits are generally unprofitable for banks, those accounts make the banks money in other ways:
REBECCA BORNE: Fees.
Rebecca Borne is an analyst at the Center for Responsible Lending, a national bank watchdog group.
BORNE: Fees play a significant role in the profitability of banks. And they’ve really played an increasing role over the last several years, as banks have been squeezed more on interest rate spreads.
The spread is the difference between what banks pay for money, and what they charge to loan it out – with interest rates at historic lows.
BORNE: Over the last decade or so…
– banks increasingly rely on fees.
BORNE: …back-end, what we call back-end, or hidden fees that tend to be not transparent, and tend to have a significant disproportionate impact on checking account customers who are most struggling financially.
In 2009 the Federal Reserve changed the rules on overdraft fees, so now customers have to opt in. This was supposed to hurt bank revenue, but it’s not clear yet if that’s happening: data from the Sunlight Foundation shows it has. Revenues from fees are actually down from 2009. To compensate, the banks have tried introducing other fees. But that hasn’t gone over so well.
The five dollar debit fee initially proposed by Bank of America, for example, is dead in the water. Just over a month ago, it was proposed by the bank and met with the ire of everyone arranging with consumer groups, congressmen, even President Obama.
Both Wells Fargo and JP Morgan Chase are abandoning their plans for the $5 debit fee. Yesterday, Sun Trust and Regents Bank announced that they too would be giving up the fee.
One last reason the big banks might actually care about their masses of departing customers: publicity. There was an economic reality behind the bailouts: The big banks controlled too much money to just collapse. But there was a political reality too. Banks like Bank of America and Wells Fargo used to have an image as America's banks. That's starting to change, and with every switch to a credit union, it changes a little more.
For Crosscurrents, I’m Charlie Mintz.
Did you move your money on Bank Transfer Day? Do you feel good about your bank? Let us know on our Facebook page.