Banking


Mervyn King, Governor of the Bank of England, is normally noted for his restrained and diplomatic language in statements concerning interest rates and the general performance of the UK economy.

However, this reserve and restraint appears to be changing. During the Northern Rock banking crisis in the summer of 2007, he justified his reluctance to intervene and save the bank by reference to ‘moral hazard’. By this he meant that banks, like every other private sector organisation, should be subject to normal commercial forces. If the directors act wisely, the bank will grow and prosper. If they act foolishly, they will make losses and risk takeover or even bankruptcy.

Several commentators made light of his remarks and suggested that he may have been visiting lap dancing clubs frequented by younger City traders. The amusing comments lasted for several weeks, but before the story ended, the Governor had performed a spectacular U turn. The threat of moral hazard had been overshadowed by the lines of depositors outside Northern Rock branches who were waiting to withdraw their funds.

The Chancellor of the Exchequer, Alistair Darling, described the action of depositors as irrational and felt obliged to stop the panic by guaranteeing all deposits at Northern Rock. The bank was subsequently nationalised or taken into public ownership.

In the US, the pattern was repeated. On the one hand, the Fed wished to respect market forces and let poor performing banks fail, but at the same time was mindful of the wider implications of such failures.

Eight banks have been closed in the US during 2008 by state and national regulators. The most significant casualty being IndyMac of Pasadena, California and this was the second largest collapse in US banking history. Although, the Federal Deposit Insurance Corporation is expecting to payout some US$ 7 billion to depositors, this will only cover the first US$ 100,000 of each account. It is estimated that some 30,000 of IndyMac’s customers have deposits in excess of this guaranteed sum.

However, the Fed has not implemented this policy across the board. When the investment bank, Bear Stearns, was in trouble, the Fed quickly arranged for JP Morgan to take over the bank. The irony is that Bear Stearns did not hold the life savings of small depositors, but managed investments for corporations and wealthy speculators. The Fed felt that Bear Stearns was simply too big to fail and that its dealings were complex. The failure of Bear Stearns would lead to a contagion and drag many other large players to the brink. The international dimension of Bear operations, also meant that the global standing of all US financial institutions would be adversely affected.

The action by the Fed has drawn criticism from many quarters. It has bailed out an investment bank which managed funds for wealthy clients and has let a bank which specialised in mortgage lending fail. This sounds like public support for the wealthy and privileged while poorer people have to face the cold wind of capitalism.

Both the Bank of England and the Fed are trying to devise prudent and coherent policies in response to criticism and public concern. This is an urgent process as the fallout of the credit crunch is far from over and other banks remain fragile.

The behaviour of banks during the years of easy credit was akin to herd instinct behaviour. Financial derivatives, based on the packaging of US subprime mortgages were popular bank investments. They were also given top ratings by agencies such as Standard & Poor’s and Moody’s.

However, these rating were flawed. The imaginative and complex way in which mortgage debt was sliced, diced and repackaged meant that credit rating became based on guesses and not hard facts. When these ratings were downgraded the repercussions were immediate and significant. For example, the UK buy-to-let mortgage lender, Bradford & Bingley, suffered a serious reversal when Moody’s revised its rating. This led TPG, formerly Texas Pacific Capital, to withdraw from the proposed purchase of 23% of the bank’s shares.

Mervyn King, in a speech on 10 June 2008, commented on the increasingly risky behaviour of banks. He said ‘If banks feel they must keep on dancing while the music is playing and that at the end of the party the central bank will make sure everyone gets home safely, then over time the parties will become wider and wilder.’

If the adverse effects were limited to hangovers by party-goers, this may be of little consequence. But when the party ends, unfortunate and innocent people have their houses repossessed and some elderly folk lose their life’s savings.

Not only are banks cushioned against the implications of disastrous investments, their top management seem to be immune from criticism. In the UK, Sir Fred Goodwin, Chief Executive of RBS defended his position after his bank revealed a GBP 5.9bn loss while Michael Geoghegan of HSBC, after indicating a possible US$ 6bn loss, asked shareholders for 3 years to sort matters out.

At the same time, all major banks are calling in loans to small and medium size business in an effort to boost their cash holdings. These loans can be called in on demand and the borrower does not need to default before this takes place. This action understandably causes outrage in the wider business community and will lead many small firms into bankruptcy.

The problem of bank failures and public bailouts is now a matter of serious concern. The party is indeed over, and the party goers are back in the office actively foreclosing on mortgages and calling in loans to small companies. The challenge is too great for the Bank of England and the Fed to handle without direction and support from their respective governments.



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Banking


History of banks

The first modern bank was founded in Italy in 1406 and was called Bank of St. George. Since 1406 banks have sprouted all over the world and have created different specialties for financing.  For example, retail banking mostly refers to a regular bank that deals with deposits and withdrawals between the consumer and the bank. Commercial banking refers to banks that mostly work with deposits and small business lending from corporations and large businesses. Investment banks work with stocks, bonds, mergers and acquisitions for corporations. As our society and business world becomes more complex, financial institutions are following suite and are specializing to fit our needs.

Retail banks specializing to fit our needs

Not only have banks specialized to fit our business needs they’ve also adjusted to meet our personal needs. As technology advanced and internet, World Wide Web and email was created we started doing more work more efficiently. We’ve become dependent on computers to speed up processes. For example, before computer technology, businesses would have to travel to meetings across town or even across state. Now, with internet and computers, businesses can save time and money and conduct a web meeting with anyone from anywhere at any time.  With this business technology being used everyday why would consumers want to personally travel to their local retail banking businesses to take care of their banking needs? The days of waiting in line at the bank with two forms of ID on pay day are over. Now companies can direct deposit your paychecks straight into your account. And, forget about writing checks to pay bills you can now go online and pay your bills with the click of a mouse. And, if you need to move money from one account to another just do it online.  

Commercial Banks

Commercial banks have been created to specialize in withdrawals, deposits and loans for corporations or large companies. Small business lending is part of the services that commercial banks provide. And, with the technology advancements, commercial banking has stepped up and made it easier to apply for small business loans with a quicker approval process. A lot of banks have done this by implementing business rule engines and automated decisioning software which speeds up the approval process. These types of investments allow consistent and accurate evaluations of applications and gives results in a timely manner. This is beneficial for the applicant and the financial institute. The quicker approval process allows the customer to build their location faster or fix that broken sign faster and it allows the financial institutions to do more loan volume.

Investment Banks

Investment banks work with stocks, bonds, acquisitions and mergers of corporations. The biggest change with these types of banks is the capability of being able to go online and trade your stocks and bonds in real time. The advance in this technology has given some talented people a way to earn a living by sitting in front of their computers and tracking their investments.

Banks have certainly adapted to the personal and business lifestyles of today and have saved consumers, business owners and investors a lot of time and sometimes even some money for providing so many online banking solutions.



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Banking


As the banking industry continued to hemorrhage in 2008, 25 U.S. banks failed. Among them were Washington Mutual and IndyMac, the first- and third-largest bank failures in U.S. history, respectively, but there were also scores of smaller regional banks throughout the nation.

According to the American Bankers Association, 98% of the nation’s 8,500 banks are considered well capitalized, making the chance of any one bank going bankrupt highly unlikely. Still, bank failures increased markedly in 2008 and will likely continue in 2009 under current economic stresses.

Most U.S. banks are insured by the Federal Deposit Insurance Corporation (FDIC), so in the case of a bank failure, any one individual’s bank deposits, up to $250,000 at any individual institution, are protected by the FDIC. (The coverage limit, which Congress increased last year due to the banking crisis, will remain in force at least through December 31, 2009, but may then revert back to $100,000 if Congress takes no further action.)

But what happens to your mortgage, car loan or credit card account if the bank that loaned you that money goes out of business? Could their loss be your gain?

Unfortunately, you are still on the hook for any and all debt you have incurred. If your bank fails, you’ll need to pay close attention to how you handle your loan payments in the ensuing months.

Here’s what to do:

1. Continue making your monthly payments on time, and as usual. Don’t fool yourself into thinking that the upheaval of a bank failure is an excuse to skip payments. Doing so will only hurt your credit, as late payments will be reported to the credit bureaus; if you skip payments on a credit card account, late payments could also increase your interest rate.

In the event of a bank bankruptcy, the FDIC will assume control of the bank until it finds a stronger bank willing to buy the assets of the failed bank. Because your loan is a legal contract, neither the FDIC nor any bank that buys the failed bank can change the terms of your loan, and you, as borrower, are still bound by the same terms to repay the loan as originally agreed

Credit card account terms, however, are not fixed like a house or car loan. If another bank purchases a failed bank’s credit card accounts, the new bank is not required to honor the interest rate or other terms of the original account, like annual fees, over-limit fees or late fees. Still, it’s in the new bank’s interests not to reshuffle the deck, because making radical changes could trigger an exodus as the old bank’s credit card customers reject the new terms en masse

In short, most credit card holders won’t notice any changes in how they can use their cards, but if you could be considered a borderline credit risk by the takeover bank, it’s possible they’ll change your account terms or even close it. Cardholders with a high credit score have the least to worry about.

Financial planner and author Suzie Orman advises keeping copies of your cancelled checks and loan payments for at least six months following the takeover of your bank to avoid potential problems if your payments aren’t recorded during the transition. (If that were to happen, you would then need to check your credit report to ensure the takeover bank has not reported your payments as late or delinquent.)

If you’re already delinquent on your mortgage payments, there’s a chance that bank foreclosure proceedings will be temporarily stopped, giving you a chance to negotiate an agreement on payments that help you stay in your home.

2. Read your mail and any correspondence concerning your bank’s failure. It’s important to be aware of any changes regarding to whom you write your checks and where you mail them, but continue writing your checks and mailing payments to the same address until you are notified otherwise. Be careful, bank failures represent another opportunity for scammers looking to steal money from unsuspecting bank customers by concocting bogus emails or websites redirecting your payments.

Check the FDIC website for specific details on how accounts and loans at each of the banks that failed in 2008 are being handled.

Although the FDIC insures bank accounts, experiencing a bank failure when your personal savings are involved is still unsettling, and most customers would prefer to avoid that possibility altogether. To protect yourself:

1. Be sure your bank is FDIC-insured.

2. Be sure that your deposits at any one bank, whether they’re certificates of deposit, money market accounts or savings and checking accounts, don’t exceed the $250,000 FDIC coverage limit.

3. Be cautious about opening any one-year or longer-term CDs that exceed $100,000 before December 31, 2009. Unless Congress acts to continue the extension of the FDIC coverage limit to $250,000, a CD over $100,000 may not be fully insured after that date.

4. Check the strength of any institution with which you’re considering banking by visiting an online bank rating service. Although many bank failures can’t be anticipated, understanding the overall strength of your bank can be helpful in assessing the risks.



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