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Banking on Banks

Not even the 2001 recession hurt the banking industry.

By GENEVA WHITE

While high oil prices have forced most businesses to tighten their budgets, some industries are flourishing and expanding. Banks have benefited from unprecedented prosperity. Not even the 2001 recession hurt the banking industry because while unemployment rates were climbing, so were consumer spending, consumer borrowing and business borrowing. The largest banks are pursuing high net-worth clients, managing money for high-income earners, according to Crain's Chicago Business.

"The low interest rates are a very favorable environment for banks," says Federal Deposit Insurance Corp. spokesman David Barr. "On top of that, the economy has been doing very well."

Consumers have taken advantage of those low interest rates, particularly through mortgage refinancing, Barr says. "That sort of slowed, but now borrowers are taking out home equity lines of credit," he says. "All these factors have helped the banks' bottom line."

But the future didn't always look this bright for the banking industry. In the late 1980s and early 1990s, banks and savings and loan institutions were failing in record numbers, Barr says. While that period could never be compared to the Great Depression, it definitely was one of the darkest eras for banks in recent times. At least two major factors played a role in that failure, Barr says--a downturn in the energy, agriculture and real estate markets and lax oversight by management and regulators.

"The way banks are positioned today, they have historically high capital levels and have had record earnings," Barr says. "There's not much on the horizon to change that."

The downside, though, to the lower interest rates that help banks, is that there is less interest on consumers' deposits, Barr adds.

Not everyone, however, credits the success of banks to just a stronger economy and lower interest rates. Another force is also at work nationwide, says Linda Sherry, director of national priorities for Consumer Action based in San Francisco, a nonprofit consumer education and advocacy group. That force is high fees.

Recall several years ago, Sherry says, when fees such as late payment charges or overdraft charges were minimal compared to today.

"Late fees on credit cards are the ones that are really bringing in the bacon," Sherry says. "If the person doesn't pay on time they can be subject to a late fee. Sometimes that late fee can be assessed even one day after the payment has not been received. We really feel that's too aggressive in charging people late fees when they're only one day late."

Sherry says the top 10 national banks in the United States issue about 86 percent of all credit cards. "They've got people over a barrel," she says. "They're not subject to state laws so they charge whatever they want."

Although the FDIC's Problem Bank List is at historically low numbers, not every bank has been able to stay afloat in such a favorable environment. The last bank failure was that of the Bank of Ephraim in Ephraim, Utah, in 2004. But a bank failure should be of minimal concern to the customer, Barr says.

"If a bank fails, your average customer wouldn't even notice," he says. "It's that smooth of a transaction. For the average customer, it's business as usual."

A bank failure would only be a problem for a consumer, Barr says, if his or her money weren't properly insured. The FDIC insures up to $100,000 a customer at each bank. Still, there are ways of getting around that $100,000 limit and having more money insured at one bank, he says.

"But the rules are tricky," Barr adds. "If you don't follow them you could lose a ton of money [if the bank were to fail]."

Barr gives a scenario of a husband and wife wanting to have $800,000 insured at one bank. The husband, he says, would have $100,000 in an individual account, while the wife would have another $100,000 in her own account. They then could have a joint account with $200,000 insured. Each also could have $100,000 in a retirement account such as an IRA, and each could have trust funds of up to $100,000, naming one another as beneficiaries.

The FDIC web site, www.fdic.gov, includes an electronic deposit insurance estimator that can tell an individual if his or her deposits are secured. Customers can also call the FDIC at 877-275-3342.

"Banks are in a strong position," Barr says. "That means they're ready, willing and able to lend money." o

Published: February 01, 2006
Issue: Winter 2006