Banking Law

A recent article in The New Mexico Business Weekly publicizes yet another way that federal bank regulators are beating up community banks: increased FDIC insurance assessments.

The article focuses on a couple of specific examples, local community banks that saw their annual FDIC assessments nearly quadruple from 2008 to 2009. On top of that, FDIC-insured banks were forced to prepay three years worth of assessments at the end of last year. Nationwide, FDIC-insured institutions paid the FDIC $47 billion at the end of 2009. At a time when too-small-to-save bank capital levels are already under distress, this type of "bleeding" has consequences that ripple beyond the banks themselves.

That money had to come out of banks? profits, capital reserves or dividends, and it has left banks without the ability to make more loans, said bankers and industry experts.

?Indirectly, it does inhibit our ability to loan, because in this case, dollar for dollar, it reduced our capital by $9 million,? [First Community Bank CEO Pat] Dee said. ?The money comes from our profits, and it has had a huge impact.?

?The more money they take out of our profitability, the less we have to lend in our communities,? [Century Bank President Don] Padgett added. ?It also means that we have to charge more for our products and services, which we do.?

[...]

New Mexico banking consultant Joe Badal, owner of Joseph Badal & Associates Inc., said the higher premiums have a huge impact on a bank?s ability to lend because lending is often done on a 10:1 ratio, meanings banks loan $10 for every $1 they have on hand as capital.

?If a bank gets hit with an additional $1 million premium, that?s $10 million less it?ll be able to lend,? Badal explained.

Fairly simple arithmetic. Disappointing results for the "community-banks-need-to-lend-more" chorus of ignoramuses, though. The facts always have this nasty tendency to get in the way of ideology. Not that that impedes ideologues, some of whom appear to rant write for the so-called main stream press.

Another point this information should hammer home to many of the ill-informed is that it's not the US taxpayer who is currently on the firing line to pick up the tab for the FDIC's aggressive butchering of the community banking industry, it's the rest of the banking business itself. Of course, by the time the dust settles, or, more likely, following the departure of St. Sheila and the installation of the poor sucker who will follow her her successor as Chairman of the FDIC, the FDIC could very well be forced to tap the public treasury because the banking industry will have reached the limit of its capacity to pick up the tab fetish for failures. By that time, hundreds of more community banks will have disappeared and, instead of continuing to eat the hand that feeds it, the FDIC might even get creative and suddenly discover solutions like...oh...ten-year amortization of commercial real estate losses and other means of forbearance that are currently staring them in their eyes-wide-shut but that don't fit into their "too-many-community-banks" and "save-the-borrower-not-the-bank" memes.