Four Issues Putting Pressure on Banks
One of the comments being heard from many bank customers over the past several months is that they’ve experienced a noticeable drop in the service they receive from their bank. The reason for this is somewhat understandable–banks are under a tremendous amount of pressure as more banks are failing essentially every week. You could argue that a time like this would call for improved customer service, but banks seem preoccupied to many of their most loyal customers.
There are several areas where banks are under a significant amount of pressure right now. Here are some of the issues facing banks:
- FDIC Is Running Out Of Money: With 95 bank failures in 2009, FDIC insurance has been called upon many times this year to cover the deposits of bank customers. The fund is not an unlimited pool of money though and it’s not accustomed to such a rapid succession of bank failures. To solve the problem, the FDIC wants banks to prepay fees for the next three years to build the fund back to $45 billion. The problem for banks is that this solution means coming up with three years worth of fees when they are already strapped for cash. The FDIC has the option to approach the Treasury for funds as well, but they are choosing to seek funds from member-banks first.
- Pressure to Make Loans: Even though the recession seems to be approaching its end, the credit crunch is ongoing from the standpoint that it’s difficult to get a loan. Banks have money now from TARP funds and from raising capital on their own, but they’re hoarding that cash more than they’re lending. Major banks are now being forced to report their loan portfolio activity, creating more pressure to make loans even if few qualified borrowers are seeking financing.
- Capital Strength: Approximately 500 banks received TARP money and of those banks, less than 50 have repaid the taxpayer loans. In addition, the stress test results forced several large banks to go to the capital markets and increase their cash on hand in case of continuing defaults. Add to this the fact that mortgage defaults and credit card defaults are still expected to increase for the foreseeable future and it’s easy to see why banks would rather sit on a mountain of cash than add liquidity to the credit markets.
- Public Perception: A factor that will take years to repair is the simple idea that the public feels that their money is safe in a bank and that the bank is concerned with more than just generating profits. There is disdain for banks that get to borrow money from the Fed at an interest rate of 0% and then turn around and charge credit card customers interest rates above 20%. Banks will need to work hard to regain the trust and loyalty of their customers.
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