Why the big banks aren’t sweating Bank Transfer Day

By Felix Salmon
November 1, 2011
Bank Transfer Day on Saturday, and some unknown number of people are going to transfer their money from their too-big-to-fail bank to a friendly local community bank or credit union.

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It’s Bank Transfer Day on Saturday, and some unknown number of people are going to transfer their money from their too-big-to-fail bank to a friendly local community bank or credit union. Good for them! Unfortunately, Bank Transfer Day is happening the week that MF Global declared bankruptcy, with the possible loss of some $700 million in client funds. And the net effect of the two is almost certainly going to be money flowing in to TBTF banks, rather than out of them.

Matt Levine has a fantastic post today explaining why it doesn’t make sense to be the customer of a small-enough-to-fail institution. This doesn’t apply to small depositors at retail banks, of course, who are federally insured. But for institutional clients, whose funds are uninsured, the moral-hazard trade here is clear:

If you were trading commodity futures in the last few years, a lot of things could have gone wrong. Like, your commodities could have moved against you. One thing that you were probably less focused on was that your CME member, CFTC regulated, SIPC insured futures broker would not only file for bankruptcy but also maybe forget where it put your money. In the future, you’ll be focused on it…

The main fallout will probably be that if you have the choice to work with a too-big-to-fail bank or a just-small-enough to fail bank, on a whole variety of things, you’re going to go too-big-to-fail. Sure, there are lots of small brokers who are well capitalized and take the time to get the little things right, like segregating customer accounts. But how can you know unless you do a lot of diligence? Easier to just trust that a megabank squarely in the regulators’ sights will get it right – or, if they get it wrong, won’t be allowed to blow up in a way that blows up customers.

This is one reason why the big banks are blithely unconcerned about people withdrawing their funds on Saturday. (Which in reality won’t actually happen overnight: first you open up a new account at a credit union, then you move some of your funds over, while leaving the old bank account open, then you start changing your direct-deposit and direct-debit instructions, and eventually, after a month or two, you feel safe closing down the old account.)

And the big banks don’t particularly want all those retail-deposit funds — they’re getting precious little interest on them, and they come with all manner of expensive obligations to mail out statements and provide smiling service at teller windows and generally do the whole customer-service thing, which as we all know big banks are very bad at. Historically, they’ve done what they have to do on that front because they’ve been able to extract all manner of overdraft fees and interchange fees and the like, but that fee income is shrinking now, thanks to Dodd-Frank, and the fact is that millions of small bank accounts are actually unprofitable now for the big banks, and those banks won’t shed many tears if those customers go off to a credit union instead.

Meanwhile, the big-fish customers — large corporations, and municipal governments, and the like — are moving their millions to the TBTF banks, using a kind of “no one ever got fired for buying IBM” logic.

So while I think it’s great that people are moving to smaller banks and credit unions, I’m not kidding myself that doing so is going to harm the big banks at all. In fact, it might even help them, at the margin.


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If the big banks don’t want all those retail deposit funds, why don’t they get out of the business? I don’t know if they are getting precious little interest on them, they get to lend it out at much higher rates, whether to the treasury (at a few per cent), mortgages (a little higher), and credit cards (often 20% or more). If they got out of the retail bank business, then maybe they wouldn’t be too big to fail, so they do need those retail customers after all.

If the large banks didn’t want small retail customers, they would get rid of them. They already charge fees for small accounts, all they have to do is increase those fees and the levels at which they get decreased, and they will lose more of those customers.

Posted by KenG_CA | Report as abusive

If what you say is true, then BofA’s retrenchment of its debit card fee wasn’t necessary…just let the small people leave.

Otherwise, you’re being more cynical that realistic on the impact of all those little people and what happens when they choose to take their banking (and mortgages and loans) elsewhere.

Posted by GRRR | Report as abusive

Why do you assume that only people with small accounts will do this?

Interesting point about municipal governments. We should find out where our cities bank, and ask them to use local banks.

Universities, too.


Posted by MacCruiskeen | Report as abusive

The VP of retail relationships at my small bank (which struggles with high overhead costs) says a free checking account with e-statements, an average balance of $750, and $750 of debit card flow per month generates $100/year in profits by itself. Add in a car loan, or a home loan and the profits only rise from there. Big banks desperatly want small non interest bearing accounts. It’s litterally free money.

Posted by y2kurtus | Report as abusive

That $250,000 federal insurance with major banks is also done with credit unions. The National Credit Union Administration (NCUA) handles that. Not only are you being misleading and irrationally cynical, you’re lying to readers. Knock it off.

Posted by zwull | Report as abusive

That’s okay if they’re not sweating Bank Transfer Day :) This is a gradual process, with more and more people switching to Credit Unions.

I love capitalism and market economics! Institution wants to charge you $5/month to use a debit card? Go for it! Knock yourselves out.. We’ll just switch over to Credit Unions. More and more people will do so..

So that’s okay.. Don’t sweat Bank Transfer Day :) Don’t worry about us switching over.. :) Keep raising your fees.


Posted by Bob80001 | Report as abusive

Said the Feds, in a stern admonition,
At a broker’s insolvent petition:
“We place our reliance
That money of clients
Is far from your trading position.”


Posted by DrGoose | Report as abusive

Aren’t deposits like overnight funding for investment banks? If there were a serious level of flight, wouldn’t that be the same as the commercial paper market drying up for Lehman? How much bad paper do you think BoA holds? The less deposit base they have, the bigger percentage of their capital base will be eaten when they have to take the inevitable haircut.

Posted by winstongator | Report as abusive

It’s a matter of banks first providing a free service then deciding to start charging for it, especially when there are plenty of others out there willing to take your money. Going through the inconvenience of changing banks when you don’t want to but will if your bank is clipping you is added insult. Some banks will give you significant $’s to jump their fence nowadays. I think the banks that decided to nix the fee figured the customer badwill aspects just weren’t worth the crumbs the fee would generate. I’m glad they decided to drop it because I really do like the conveniences of my bank.

Posted by Woltmann | Report as abusive

One reason why municipalities and universities should bank with banks (local or big) and not credit unions is that credit unions don’t pay taxes. So by helping the income of credit unions, they are not helping themselves or the residents of their municipalities.

Posted by Radiance11 | Report as abusive

Oh, and take a look at new regulations that allow credit unions to start doing the same things as banks. All the credit unions in my area have started charging the EXACT same fees as the banks! So credit union advantages are going to become a thing of the past.

Posted by Radiance11 | Report as abusive

I find the writers comments completely incorrect. Banks and most for profit financial entities are leveraged which is measured by how much actual cash that they have on hand vs debt. The deposits although most maybe in small amounts may eventually add up. For every dollar that is taken out that increases leverage ratio. MF was frozen after bad accounting and being leveraged 33:1 meaning that it had borrowed 33 dollars for every one dollar it had on hand. It also is bad for these institutions because some of there customer base left after the bailout, and earlier fees that were imposed thus adding to their losses of customers. The customer base the amount of deposits and the base in which they can extract their fee based income is shrinking also with every customer that leaves. I think that also the strongest counterpoint to the author’s argument and was stated by earlier commenters is if they don’t need these customers then why have these fees reversed. I found the authors comments seeming to contradict logic.

Posted by ksell | Report as abusive

Wow Felix, your story of how our wee accounts with big banks do nothing to benefit the banks made me silently weep. oh and i am only to guess that you are a dodd- frank hater? a fiscal conservative? who feels that any regulation on the government’s part only hurts corporations and thusly hurts everyday americans? i wonder if the east side parish in san jose pulling 3 million from bank of america will also have no effect on their solvency? i wonder if other non profits, churches, and small businesses who are doing the same will have no effect on your too big to fail bank? your article is absurd and exposes reuters for the corporate media machine it is. thank you for that

Posted by OccupyTogether | Report as abusive

These comments are definitely lower grade than normal.

Some corrections:

@ OccupyTogether: IIRC, Salmon is/was on the board of People’s Credit Union; he’s definitely not a TBTF banker.

@ ksell: you get the definition of leverage and the effects of account closing precisely backwards. Leverage is assets divided by equity. Deposits are liabilities to a bank. When someone closes an account, assets and liabilities shrink by the same amount, equity stays the same. The upshot is that leverage decreases when accounts are closed out.

@ zwull: Salmon is talking about accounts in excess of insured amounts. Whether that’s 10k or 250k is really neither here nor there; we’re talking about millions.

Posted by jpe12 | Report as abusive

Credit Unions – Why I’m not sweating the big banks. :)

Posted by Bob80001 | Report as abusive

Information free commenting. To make most of the assertions made, the numbers have to be run (determined) and their proportions assessed so that an evaluation of their impact on bank behavior is possible. (We can disregard the anti credit union Radiance11 entirely, IMO.)

I suspect that the loss of small accounts is not a big deal for these financial center banks. They have been rumored to be making strategic decisions to raise prices to small accounts, segregating the marked between those who would move rather than pay and those who would stay and pay anything out of inertia. The assessment was that the second group was large, because of general public FUD regarding finance.

Banks reversals of some of this strategy can be attributed, inferentially, to an assessment that 1) the action of OWS and the 99% has made the public aware of financial affairs it generally pays little attention to, and will greatly increase the number who are inclined to move their money and decrease the number who are too fearful or lazy to do so; and 2) the bank actions designed to squeeze the last possible $ of revenue out of the most inertia determined customers – the aged and uneducated – has begun to draw the attention of legislators and regulators and risks significant blowback from those quarters. That too can be attributed to the mobilization underway by OWS and the 99%.

But these factors do not counter Salmon’s point – the financial center banks will probably gain more from the movement of large accounts into their ambit, than they are going to lose by movement of small accounts out, or by surrendering some of the robbery profits they had planned on by fee increases.

How we can increase the strength and attractiveness of regional banks and CU’s to large depositors and avoid further concentration of the industry is a very real, but separate isssue.

Posted by JimPivonka | Report as abusive

So I went off and did a little digging for info on the accounts of the city I live in. Currently they use a largish regional bank (owned by a foreign bank). But they have already announced that when the current contract is up, they’re going to change the bid requirements to make it easier for local banks to bid for the contract (apparently, coin counting services for the parking meters is an issue). They do, as a regular practice, keep excess cash reserves in insured CD accounts at some of the local banks. There are state-level procurement laws that govern the bid process. As far as I can tell the state laws do not require, but strongly encourage, the use of banks based in the state.

Posted by MacCruiskeen | Report as abusive

Agreed, I fully expect my TBTF bank to be blithely unconcerned when I move my accounts. They’ve been blithely unconcerned about me since I opened them, so I wouldn’t expect that to change now.

Posted by JPorter1000 | Report as abusive

Seems no one has even pointed out the obvious. With the loss of the 99% what will these TBTF banks do with all their locations? Seems obvious to me all these branch offices exist for one major purpose.. to serve the 99% this fool of a reporter claims they would be better off with…
to the TBTF.. welcome to your own forclosures nightmare (HUGE HUGE GRIN) Seems you’ll be paying for alot of uneeded office space :)

Posted by servantglory | Report as abusive

Seems no one has even pointed out the obvious. With the
Correction.. better off without.. sorry

loss of the 99% what will these TBTF banks do with all their locations? Seems obvious to me all these branch offices exist for one major purpose.. to serve the 99% this fool of a reporter claims they would be better off without…
to the TBTF.. welcome to your own forclosures nightmare (HUGE HUGE GRIN) Seems you’ll be paying for alot of uneeded office space :)

Posted by servantglory | Report as abusive

If Chase, B. of A. and others don’t want us, why do they have an office on every corner? The article is bunk. It’s your money, move it to an institution that appreciates you.

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