Our troubled economy

No need to put cash under the mattress

  • Article by: JOE WITT
  • Updated: September 21, 2008 - 11:11 PM

Minnesota's banking system is sound, and consumers are protected, one banker asserts.

There has been a glut of bad news about the financial sector recently. The past nine months have brought nearly constant reports concerning the subprime mortgage crisis, the equity market turmoil and the banking "crisis." And, reports concerning the banking industry intensify on the occasion that a bank fails.

Let's set the record straight. The banking industry -- which includes traditional federally insured, federally regulated depository institutions, your local commercial bank, thrift or savings bank -- is not in a crisis. The industry is operating in a safe and sound manner. Despite a slowing economy, banks in the United States posted $24.2 billion in earnings in the first half of 2008. While the banks' earnings during the time period were lower than earnings in the first half of 2007, the returns were noteworthy.

Also, the banking industry's capital is at historic highs. Banks use their capital and their loan-loss reserves as a buffer against potential operating losses. In August, the industry held $1.35 trillion in capital, plus $144 billion in reserves, for a total buffer of almost $1.5 trillion. Banks are well-positioned to continue helping their communities grow and prosper.

Minnesota is fortunate to have an especially robust banking industry. We have the third-most bank charters in the country, which means consumers here have many good banking options. From family-owned local banks to the large regionals, the Minnesota banking industry is strong, well-managed and well-capitalized. Our banks continue to be a source of financial stability and an engine for economic development.

At the same time, it is true that there are challenges in today's economy. And yes, some banks will fail. But you have to put today's banking environment into the proper context. So far this year, 12 banks in the United States have failed. That pales in comparison with the number of bank closings during the height of the savings and loan crisis in the late 1980s and early 1990s. At that time, there truly was a crisis: In 1989 alone, 534 banks closed. Since 1995, 10 or fewer banks have failed every year before 2008, a rate that remains at low levels historically.

The recent decisive action by the government to take over mortgage lenders Fannie Mae and Freddie Mac also was admittedly tough for the banking industry. But it was necessary to bring confidence and certainty to the housing markets.

Last week's Chapter 11 filing by Lehman Brothers, an investment bank, and Bank of America's acquisition of Merrill Lynch underscore that these are extraordinary times that call for extraordinary solutions. It is vital to note that commercial banks are subject to more regulation than investment banks such as Lehman Brothers and Merrill Lynch. Commercial banks are insured by the FDIC -- the Federal Deposit Insurance Corp. There is even a chance that some of the employees who were victims of the investment banks on Wall Street could find their way to Minnesota for work. The state's financial sector added 1,250 jobs in July alone.

Federal and state banking regulators closely monitor the financial health of every commercial bank. When needed, the regulators work to improve the health of banks that are struggling. In the vast majority of cases, the regulators are able to improve the condition of those troubled banks without a failure occurring. If a bank does fail, a resolutions team employs a well-established process that protects the bank's customers with as little disruption as possible.

FDIC protection

Bank depositors are protected from a financial standpoint as well. When a bank failure occurs, the FDIC covers an individual account in a commercial bank, thrift or savings bank for as much as $100,000, with additional protection for joint accounts. A retirement account is protected for as much as $250,000. I urge you to contact your banker if you have questions about the details of FDIC insurance.

When a bank fails, the FDIC insurance fund sometimes is portrayed as the equivalent of a bailout by the federal government.

That portrayal is false. The banks and thrifts that benefit from FDIC insurance protection pay for it. Banks and thrifts capitalize the insurance fund through FDIC insurance premiums. The FDIC insurance fund has more than $45.2 billion in assets and earns an additional $2.4 billion in interest annually to protect depositors.

This economic slowdown will pass, as have all the others. Know that your local bank is open for business, doing what it does best: helping meet its customers' financial needs and building strong communities.

  • about this series

  • The Star Tribune's coverage of the housing crisis, the credit crunch and their effect on Minnesotans.
  • Joe Witt is president and CEO of the Minnesota Bankers Association, the state's largest trade group devoted exclusively to the representation of commercial banks. The association represents 95 percent of the 438 banks in Minnesota.

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