[the_ad_placement id=”banner-right-placement”]

[the_ad_placement id=”banner-left-placement”]

Letter to the Editor: Calming bank worries

 

In early March, two significant US banks failed.  Professionals are working on this, but it matters a great deal what the public thinks.  What can be said so far?

First, the FDIC system works wonderfully.  Depositors with accounts less than $250,000 do not have to wait months or years for lawsuits and bankruptcy court.  They get their money in a day or two.

Second, both US banks in the news were financially sound, but victims of panic by their large depositors.  Apparently, depositors with over $250,000 looked at small decreases in the value of the bank’s investments and fled.

This is new.  Not so long ago, banks were centered on taking in deposits and making loans.  They could invest in stocks and bonds, but only with the bank’s own money, not with money owed to the depositors.  In this way, the bank’s profits (owned by its investors) might go up or down with stock or bond prices, but the bank would still be sound because its depositor’s money was safely separated from the bank’s investment activity.

In 1999, new laws ended this separation.  Now we see the fruit of that folly.  Large depositors see that changes of investment profits could, hypothetically, threaten their deposits, even though small depositors are safe.

A third point is that these panics are still irrational.  If the prevailing interpretation holds true, large depositors were spooked by small declines in the current value of Treasury and other government bonds.  These are generally considered the safest investments in the world.

After the panics, one of our local banks started putting out plates of cookies in their lobby.  Very smart.  When even wealthy, sophisticated players can be stampeded, reminding customers to pause for a calm moment is good business.

Scott Corey

Quincy

[the_ad_placement id=”banner-left-placement”]