Banking system's history should help ease fears

March 23, 2009
Recent talk of bank nationalizations has caused confusion in the markets and has the public worried. Since people must have confidence in the financial system for it to function properly, it is incumbent upon our leaders to take action and assure the people their money is safe.

The banking system, if properly handled, should not cause further problems for the economy. We have a system that takes care of the banks and, in fact, most banks are in pretty good shape. This was the message from Warren Buffett, who recently spent a morning on cable TV fielding questions from the public and ruminating on the current state of the markets and the economy.

Buffett gave a bit of a history lesson, noting that, throughout the 1800s, there were at least six large financial panics where people lost confidence in banks. He quipped, "The reason they called them panics was because if you went to the bank and couldn't get your money out, you panicked."

Over time, our country finally learned the importance of faith in the banking system and, in 1933, the Federal Deposit Insurance Corp. was formed to protect bank depositors. Continuing his point, Buffett waived a stack of papers listing the names of 3,600 banks the FDIC has assisted or closed since 1934. The bottom line being that no depositor in an insured institution has ever lost a penny. Deposit protection has been a huge factor in making our economy the greatest that has ever existed.

So those fearful of bank nationalization, or whatever term you want to call it, are missing the point. Last year, nearly 8 percent of the country's deposits were moved from failed institutions, virtually overnight, and into other banks—and no depositor lost a dime. Now, the stockholders didn't fare too well, but shareholders have been wiped out in thousands of banks over the years.

Buffett thinks it imperative for President Obama to make clear that anybody who has deposited money into an insured U.S. bank will not lose money. And while the FDIC limit is $250,000, no depositor should be worried about having money in a U.S. bank, and that concept should extend to the owners of any U.S. bank's debt.

Asked about a bank being "too big to fail," Buffett offered that you don't ever want to say that to a regulator—they don't want to be told they don't have any choice. But, in actuality, the American banking system overall is too big to fail. And in Buffett's mind, the idea that American International Group should have been allowed to collapse "is crazy" and noted that "the world almost came to a stop in September."

The good news is, there are early signs the banking system is beginning to heal. The interest-rate cost at which banks can borrow versus the rate they charge on loans (the interest-rate spread) is very wide. Thus, bank earnings on new loans going forward will begin to generate new capital and work toward repairing balance sheets. In fact, The Wall Street Journal suggested it was a good time to start a new bank to capitalize on the wide interest-rate spread and a clean balance sheet unencumbered with bad loans.


Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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