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By Diane Casey-Landry
Chief Operating Officer and Senior Executive Vice President
American Bankers Association
Headlines can be misleading, and in a time of financial crisis, that can make matters worse.
Pick up a paper, or listen to the quick bursts of news on TV or radio, and what you get are reports of a subprime crisis, a "banking" crisis and market turmoil. That's only intensified on the rare occasion that a bank fails.
Let's set the record straight: The banking industry -- traditional federally insured, federally regulated depository institutions -- your local commercial bank, thrift or savings bank -- is safe and sound. And your account in commercial banks, thrifts and savings banks carry FDIC insurance. That means your account in a federally insured bank is protected up to $100,000, with additional protection for joint accounts, and $250,000 for a retirement account.
The Federal Deposit Insurance Corporation guarantees your accounts with more than $52 billion in assets to protect depositors like you.
In addition, the banking industry's capital is at historic highs. As of March 2008, the industry held $1.36 trillion in capital, plus $120.9 billion in reserves, for a total buffer of $1.48 trillion.
The challenge we are facing is that words matter. And when one word is used to mean several different things, it inevitably creates confusion. For example, we know what a bank is--or at least we think we do. Sometimes a business that wants to add status to its name will call itself a bank even though it is not an insured depository institution.
Bear Stearns was not a commercial bank. It was not an insured depository institution. It was an investment "bank."
The word bank is also applied to mortgage firms. Their function, their purpose and their regulation differ from federally insured depository institutions.
Yes, there are challenges in today's market economy. And yes, banks will fail. When that happens, a well-qualified resolutions team is put in place that employs a well-established process that protects depositors with as little disruption to the financial system as possible.
Having a safe and sound banking system to rely on shows the importance of the role banks play in our local communities and in our nation's economy. They are the source of stability and of growth. That is true regardless of their asset size, their charter or their business plan. And the vast majority of banks today hold more capital than the law requires.
Today's crisis also underscores the fact that there are two ways financial institutions can fail. They can fail due to capital insolvency or because they are liquidity insolvent. What we are experiencing now is a lack of liquidity, not a lack of capital. Capital remains strong, strong for investment banks as well as for commercial banks and thrifts.
The liquidity crisis that we have seen on Wall Street comes from a crisis of confidence. In the 1930s, before deposit insurance, banks failed because of a crisis of confidence that led to liquidity insolvency. That can also happen to an investment bank such as Bear Stearns. There is a crisis of confidence, lending lines are pulled, liquidity evaporates and insolvency is inevitable.
We all know that our financial system is being tested. But let us also remember that the system is showing its resiliency.
The Federal Reserve Board has acted to help restore liquidity by assuring everyone that they are responding to the problems in a measured way. The Fed opened up its lending facility known as the discount window to Wall Street firms and is taking steps to restore liquidity to the markets. In addition, the Office of Federal Housing Enterprise Oversight has reduced the capital surcharge imposed on Fannie Mae and Freddie Mac so they can buy an additional $200 billion in home mortgages. As OFHEO's director said in July, Fannie and Freddie "are adequately capitalized, holding capital well in excess" of what is required. And he added: "They have large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets."
And the Federal Housing Finance Board will allow the nation's 12 Federal Home Loan Banks to purchase more mortgage-backed securities to provide greater liquidity in the mortgage markets.
Meanwhile, those headlines and news reports that keep repeating the word "crisis" overlook the fact that the subprime lending crisis was caused by unregulated brokers and Wall Street institutions themselves, sometimes using the title "bank," and not by regulated, insured banks.
Federally regulated banks employ underwriting practices to avoid losses and to promote safe and sound operations. And when they do not operate appropriately, their regulators, who visit them annually, will take exception to such practices and require corrective action. That's why FDR's observation half a century ago is still relevant: "The only thing we have to fear is fear itself."
Our banking system is strong. This crisis will pass, as have all the others, and the result will be a stronger financial system with fewer unregulated players and a reminder that liquidity and capital are both important to solvency.
This information is provided with the understanding that the association is not engaged in rendering specific legal, accounting, or other professional services. If specific expert assistance is required, the services of a competent, professional person should be sought.
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