Opinion

Felix Salmon

The Bank of Cattaraugus’s numbers

Felix Salmon
Dec 24, 2011 01:56 UTC

Alan Feuer has the story of the Bank of Cattaraugus, a tiny community bank in the eponymous town an hour south of Buffalo. It’s a heartwarming tale of community banking:

A few years ago, when Ms. Bonner fell behind on her property taxes and was forced to sell her home, the bank’s president, Patrick J. Cullen, who held the mortgage on the house, had his son Thomas buy it. Thomas Cullen, who lives in Chicago, never intended to live there.  Ms. Bonner and her sister were able to stay as renters.

“The whole thing was incredible,” Ms. Bonner said the other day, a single pine branch hanging in her living room in lieu of a full Christmas tree, which she could not afford. “I just didn’t realize there were people like that in the world, people who would help you.

“Especially,” she said, “a banker.”

Feuer doesn’t get much into the financial details, but the ones he does have are intriguing:

With $12 million in total assets, the Bank of Cattaraugus is a microbank, well below the $10 billion ceiling that defines small banks…

In its 130-year history, the bank has rarely booked a profit for itself in excess of $50,000. Last year, Mr. Cullen said, it made $5,000…

The largest employer in the village is the school district, and many village residents survive, like Ms. Bonner, on pensions or government subsidies, in homes that have an average mortgage of $30,000..

Even in Cattaraugus — population 950 — Mr. Cullen says he receives at least two offers a week from larger institutions that want to buy him out. He claims to be unsurprised by these overtures, though his business is exceptionally simple: 80 percent of the loans in his portfolio are mortgages.

The bank’s official FDIC reports add a bit more detail — and show income of $8,000 on total assets of $16.2 million as of September, along with $1.1 million in equity capital. Last year, net income was $47,000, which even then was a return on assets of just 0.3%.

Total salaries and employee benefits are $276,000, split between eight employees, plus $34,000 in directors’ fees. (Both the CEO and his daughter, the CFO, are directors; his son Thomas is “Director Emeritus”.) Feuer describes Mr Cullen as “a well-to-do man”; but he’s clearly not extracting a huge salary from his bank. Instead, Cullen uses the bank as a vehicle for his civic ambitions: he holds a position of great importance in this town. It’s easy to see why he has no interest in selling the bank and getting replaced by some ambitious banker working his way up the corporate ladder. Instead, this bank is a family affair: a Cullen has been president since 1957, and Cullen’s daughter will surely replace him when he retires.

Understandably, Bank of Cattaraugus doesn’t have online banking, although it does have something it calls “bank-by-mail”. And there are signs of significant political clout, too: the bank is home to state and municipal deposits totaling $5.42 million, more than 37% of its total deposit base. Without those deposits, its hard to see how the Bank of Cattaraugus could run any kind of profit at all.

What the bank does have, of course, is much more liquidity than any individual in town. And although it doesn’t engage in complex trading strategies, it does do its own kind of risky proprietary trading: the bank took took over one abandoned house, for instance, fixed it up, and sold it for an eventual loss of $500.

Most interestingly, it also has a local monopoly. As a result, it faces little competition when it comes to things like deposit interest rates, and extremely little competition even when it comes to lending rates. No other bank understands local property values like the Bank of Cattaraugus does, which almost certainly means it’s often the first and last stop for locals looking for a mortgage. Cullen also tells the story of a local Amish man who got an $85,000 consolidation loan from the bank: no one else would loan him anything like that, given his declared income of just $2,300 a year. But the result is that if you get a loan from the Bank of Cattaraugus, you’ll pay whatever Patrick Cullen says you’ll pay.

Now there’s no evidence that Cullen is abusing his monopoly at all. The bank has earning assets of $13.7 million, on which it earned net interest income of $544,000: that’s an average interest rate of less than 4%. And service charges are running at $58,000 per year, which works out to just under $3 per month, on average, for each of the bank’s 1,625 deposit accounts. That’s an entirely reasonable sum to pay for the utility service of having a bank account at your local community bank.

The Bank of Cattaraugus, then, really does look as though it’s everything Feuer says it is. It’s run by a pillar of the local community, to really help local businesses — and the town itself — thrive. I’m sure that if you wanted to buy up the old hotel in the center of town and spruce it up a bit, Cullen would give you all the help and support you needed. The Cullen family gets to live well in, and provide some financial plumbing for, a town they clearly love and feel partially responsible for. And the bank looks perfectly healthy, even without much in the way of profits.

Of course, this kind of model doesn’t scale: that’s kinda the point. And neither could some enormous franchise with hundreds or thousands of branches ever provide the same kind of service that the Bank of Cattaraugus does now. But without what you might call the Cullen family’s noblesse oblige, they would surely have sold the bank for a seven-figure sum by now, and gone off to more lucrative careers elsewhere.

How can one institutionalize that kind of citizenship? The answer is simple: credit unions. While the Bank of Cattaraugus is a prime example of a small community bank which really is doing God’s work (on a total asset base rather lower than Lloyd Blankfein’s annual salary), everything it does could also be done by a credit union, without the associated risks of the owners selling out at some point.

Everything, that is, except one important thing: banks are allowed to accept state and municipal deposits, while credit unions are not. If the Bank of Cattaraugus became a credit union tomorrow, it would have to return $5.42 million in deposits, and it would become insolvent overnight. So while I don’t for a minute begrudge the bank those deposits, I do wonder why credit unions don’t have the opportunity to do the same kind of thing with them. The world would be a better place if they could.

COMMENT

Auros, when I wrote my message the previous one to mine was not yet up.

Even so, you are making assumptions that a person’s salary can be lumped in with his wife’s. I did say “total salaries are so low” relatively speaking to consider the man wealthy and I still maintain that. (why you had to take what I wrote out of context is beyond me) Perhaps he made his money elsewhere as TFF says.

No need to presume me wealthy, or elitist as I make a very modest income with which I do amazing things like take care of my family, pay off my mortgage and I started saving for college when my child was 4… so it is paid for. I am not sure why you presume otherwise.

My questions arose being the article Felix is writing about speaks of the banker’s “wealth”, his modest income (either he is making a modest income or his employees are grossly underpaid, being it doesn’t state what his salary is) and the millions he is spending on museums and depressed building… he and the bank.

Posted by youniquelikeme | Report as abusive

Banking: Why geography matters

Felix Salmon
Jan 3, 2011 22:45 UTC

Jeff Grabmeier reports on some interesting research from Ohio State’s Stephanie Moulton, which shows that borrowers with low incomes or bad credit are significantly less likely to default on their loans if they borrow from a local bank than if they borrow from a distant bank or mortgage company.

Moulton tells Grabmeier that “local banks seem to offer some protection to homebuyers, particularly those with low incomes who may be seen as risky borrowers”, and comes up with a few hypotheses as to why this might be:

Many mortgage brokers base their decisions on whether to offer a mortgage on one or more key numbers, such as a credit score. In other words, if your credit score is above a certain level, and you meet other criteria, the broker will offer the loan. The same may be true of large, non-local banks, Moulton said.

But local lenders may place more weight on other factors, such as how long you’ve been working for your current employer, and whether you make regular deposits in a savings account…

In addition, local bankers are more likely to have a continuing relationship with the borrower, through the checking and savings accounts held by the customer.

“If there’s a relationship, the borrower may feel more obligated to make their payments. And the banks may provide more education and information to the borrowers, equipping them to be better homeowners,” she said.

I think the relationship point here is absolutely key. With bank loans, the give-and-take is all very asymmetrical: the borrower gets a large sum of money up front, and then does nothing but send money back to the lender from then on in. The incentive to stop paying the money back is clear.

If the borrower has a personal relationship with the lender, however, things change — and not just because of formal education and information. Making mortgage or other loan payments is a painful chore, most of the time. But for some people it can be a happy, joyful thing: I’m buying my house! I’m getting out of debt! And it’s a lot easier to think that way if you have a human local banker who is helping you reach your goals.

When reading Grabmeier’s piece, I couldn’t help but be reminded of Maha Atal’s post about Andhra Pradesh. The problem in AP, she says, and in India generally, “is not profit or size; it’s geography”:

When Yunus first started making loans to the local poor, he was pushing back against an argument from banks that people in poverty weren’t credit-worthy, that they couldn’t understand the concept of credit and therefore couldn’t be expected to pay. There was something to that argument: credit is a learned thing, both a legal concept and a social one that emerged in the developed world over centuries, whose core component is the creation of a sense of obligation between two perfect strangers.

Dr. Yunus did not actually challenge this notion; rather he sought to get around it, by demonstrating that loans did not have to be made between perfect strangers. The essence of microlending as he devised it was not simply that the loans were small, or that the rates were friendly, or even that the group system created a culture of pressure to repay the lender. It was that the groups were self-formed, that the members already knew each other, and that the obligation to repay was constructed as an obligation to one’s peers. He did not teach them to be obligated to the creditor; he saw that they were obligated to one another…

In India, the community component of micro-lending has never been taken seriously. Both the MFIs and the SHGs rely on the national financial system, not on local capital, to get started. Neither is able to operate as a borrower-owned community bank. And so both structures take as an assumption that grouping borrowers together can lead them to feel obligated to a third party, even though that is precisely the opposite of what the Bangladesh success story showed. As the sector has expanded, the distance–physical and therefore social–between lender and borrower has expanded it with it, and it is that distance, not the size of the industry itself, that is the problem.

A loan from a friend, or someone we know, is always qualitatively different from a loan from a faceless corporation. If you’re a college-educated sophisticate moving fungible funds from one account to another, it’s easy to forget this, but come down to my local credit union on check day, when a lot of local residents receive their Social Security checks. All of them have the option of having the money paid automatically into their account, but there’s always a long line of people queuing up to deposit their check in person, with a human teller. And it stands to reason that, ceteris paribus, the people who do that are more likely to pay back one of our loans than someone hundreds of miles away who just gets a printed-out statement in the mail each month.

The spectrum from India’s poor to America’s rich is a continuous one, and U.S. subprime borrowers are somewhere in the middle when it comes to financial sophistication and trust in institutions. Similarly, successful subprime lenders tend to be pretty high-touch institutions, which take great pains to position themselves both geographically and in terms of marketing materials as close as possible to those they would lend to. The average payday lender is much more likely to know any given borrower’s name, when they walk in to the branch, than any banker — and that gives the payday lender an advantage when it comes to the borrower’s willingness to repay the loan.

The problem, of course, is that opening up local branches is a strategy which is expensive, hard to scale, and difficult to implement overnight. But it certainly helps explain why lending strategies enforced in a top-down manner from distant executives with spreadsheets can end up underperforming.

COMMENT

I heard on the radio somebody from a credit union marketing group, who tracks numbers nationwide, say that about 650,000 new accounts had come to the national credit unions in a week. That was more than the average 600,000 new accounts per year that are reported. And that is just credit unions. The same interview quoted somebody from the community banks group who said the small community banks had also seen an uptick in new accounts. And that was before Saturday, so who knows how many people will finally ‘get it’ and switch their money to a local bank or credit union. Maybe 1 million accounts? That may not be much against 30 million, but it is enough to make a point to the big boys. It is way past time for all those “Mr. Potter” types at the big banks to get their comeuppance.
Veronika from http://cashadvancesus.com/

Posted by VeronikaS | Report as abusive

Union contract of the day, NCUA edition

Felix Salmon
Dec 25, 2010 05:57 UTC

Robin Sidel reports on the NCUA’s new budget:

The 2011 budget for the National Credit Union Administration, which insures about 7,400 credit unions, will rise 12% from the prior year, fueled partly by contractual pay raises for unionized employees…

The agency’s employee pay and benefits are set to climb 12% to $163.2 million in the current fiscal year. Most of the jump is unavoidable because of contractual obligations to unionized employees, who represent about 80% of the NCUA’s work force.

I would love to see more detail on this. Yes, the NCUA is hiring more examiners. And yes, I’m sure that the cost of benefits is rising fast. But 12%?

The NCUA explains, in a press release, that 37% of the increase in pay and benefits is due to a “6.1% pay increase mandated by the Three Year Collective Bargaining Agreement entered into in 2008″.

It’s worth bearing three things in mind, here. Firstly, the NCUA failed miserably in its job over the past three years, overseeing as it did the complete collapse of the corporate credit unions which underpinned pretty much the entire credit-union system. Secondly, we were already in a highly disinflationary world in 2008, when the NCUA happily signed off on a 6.1% annual pay increase in 2011. And thirdly, credit unions in general, and their trade associations in particular, have all been critical of these pay hikes.

It’s important that financial regulators can pay well to attract talented staff. But collective bargaining agreements with across-the-board 6.1% pay rises are not a smart way of doing that. And, frankly, there’s not much evidence that the NCUA’s staff is particularly talented: if you were a talented financial regulator, would you want to work for the NCUA?

It’s ridiculous that the NCUA can simply vote itself as much of a budget increase as it likes, showering money on its headquarters and its employees, sticking the cost onto the credit unions, with no real checks or balances at all. At most institutions, there’s some incentive somewhere to keep the budget in check. At the NCUA, there seems to be none.

But more to the point, it’s ridiculous that the NCUA exists at all: it should by rights have been abolished, along with the OCC, in Dodd-Frank. One thing pretty much everybody agrees on is that we have too many regulators; the FDIC should simply absorb the NCUA, along with its examiners and its insurance fund. The examiners would be part of a larger, higher-profile regulator with real teeth; occasional failures would be less prone to cause an unfair burden on credit unions; and credit unions in general would be brought closer into the financial mainstream. But sadly, if this never happened in Dodd-Frank, it’s not going to happen at all.

COMMENT

Seems that the NCUA was playing “catch up” with this contract. As a credit union member, I am concerned with anything that will increase my costs, this being one. At the same time as a union member, I am all for my bretheren getting a fair deal, which you really don’t address if they did or not.

Posted by neeros | Report as abusive

The cost of being unbanked

Felix Salmon
Oct 8, 2010 19:42 UTC

Candice Choi has a great first-person story about the cost of not having a bank account. She gave up her account for a month, to experience the inconvenience and expense of being unbanked at first hand.

The latter is relatively easy to quantify, and it’s substantial: Choi paid $93 in fees over the course of the month, which is a rate of well over $1,000 per year — very big money, given the disposable income of most of the unbanked. And she has a lot of advantages over most of the unbanked — a very high degree of financial literacy, an ability to read and understand English-language small print, and residence in a state (New York) which caps check-cashing fees.

Go read her story in full: it’s not so long, and after reading it you’ll be hard pushed to understand why people might voluntarily remove themselves from the banking system.

Yet that’s exactly what they do, for reasons Choi elucidates well:

A federal study last year found that about one in four U.S. households skirts banks and relies on services such as check-cashing and payday loans. Many of these households bring in less than $30,000 a year.

Some do it because they believe they don’t have enough money to open a bank account or were burned by fees in the past. But it’s not always a matter of choice: Many can’t open an account because of a history of bad checks or damaged credit.

There are other reasons too. Language barriers intimidate some would-be customers, or they simply feel banks aren’t welcoming. For others, literally handling their own money offers a sense of control at a time of financial anxiety.

One thing worth remembering here is that below a certain level, the poor have much the same relationship with money as the hungry do with food. It becomes something you’re always conscious of, something you’re always worried about. At that level, it really does feel a lot better to have a dollar in your pocket than to have a dollar on deposit at a financial institution which is prone to charging seemingly arbitrary fees for any or no reason.

One of my readers, Brian Jaklitsch, sent me Choi’s article with some questions of his own, making the important point that if the fees were cut in half, the savings would certainly be put to much better use elsewhere. He added:

I realize that the world isn’t as simple as I wish it were, so maybe what I am about to suggest is impossible, but you have to wonder why some large institution with enough clout to begin to change the way things are done hasn’t looked into capturing some of this market as a way to bring the lower end of the spectrum into the system. Or at least, I do. Is it really that impossible for a large bank to work on lowering such fees to the point where they either end up breaking even or making a very small profit (or, possibly, taking a tiny loss) but figure out a way to bring lower-income people into the system by allowing them to take advantage of the lower fees?

The answer here is that banks could try this — but there’s no economic incentive for them to do so. The poor and unbanked tend to be “high-touch” customers: they come in to the branch a lot, they don’t like using automatic bill-pay or ATMs, and generally they consume a lot of teller time without the bank having very much to show for it. Some banks, especially in countries like Brazil, are doing some very novel and interesting things with banking the poor — but they work because the scale there is so enormous, and they’re going after the base of the pyramid. In the US, the unbanked population isn’t nearly as homogenous or as large, relative to the population as a whole.

There are three ways that banks make money from offering basic bank accounts. The first is the old-fashioned way: getting a stable low-cost funding base from deposits. The second is by cross-selling other products, like loans or credit cards. And the third is fee income.

With the Consumer Financial Protection Bureau cracking down on the bad forms of the second two sources of income, that basically leaves the first — and poor consumers simply don’t keep enough money in their bank accounts for it to be worth the banks’ while. Banks can make a little bit extra on interchange fees on debit cards, but that’s not going to make the difference between a profitable consumer and an unprofitable one.

There’s more hope from credit unions: they exist to serve their customers, rather than to make large profits, and they’re generally much more willing to sign up for government programs trying to decrease the rolls of the unbanked. But it’s hard work, and there are no easy ways of doing this. Which means that the check-cashers and payday lenders are likely to be around for a long time yet, acting as yet another tax on poverty.

COMMENT

I feel speechless at the quality of service we have these days. Shouldn’t it be terrifying that we lost confidence in virtually any company we do business with? No tin foil hat here, just amazed that most services, from phone & cable companies to hospital & banks, do not take to heart the interest and trust of their customers. No wonder people feel contempt towards the concept of branding — companies wouldn’t need to spend a dime in branding if they treated their customers with the respect they deserve, if they did business at the most basic level, where trust is one of the most basic elements for a network of commerce to survive. But every transaction these days carry with it research and mistrust at so many levels. Consumers need to either become soldiers or drop out of the system. And it feels no one seems to care…

Posted by minsf | Report as abusive

When credit unions fail

Felix Salmon
Sep 24, 2010 22:08 UTC

There are lots of great credit unions in America, all of which are owned by their members. And then there are the corporate credit unions, which are atrocious and expensive failures. Today, the final nail was placed in their coffin when the last three big corporates were officially taken over by the government.

Trying to explain what’s going on here isn’t easy, but essentially corporate credit unions are credit unions’ credit unions. While you or I might belong to a friendly local credit union with human members, that credit union, in turn, is itself one of the members of a corporate credit union. I’m a member of (and on the board of) Lower East Side People’s Federal Credit Union, for instance; LESPFCU is one of the 2,076 members of Members United Corporate Federal Credit Union, which got taken over today. Since we’re part owner of Members United, we’re going to lose money now that it has failed. In total, the NCUA (that’s the credit union equivalent of the FDIC) reckons that credit unions are going to lose somewhere between $8.3 billion and $10.5 billion on their investments in the corporates.

We’ve already written down a large chunk of our equity in Members United, so this latest blow will be manageable. But the fact is that pretty much everybody in the country who’s a member of a credit union will be affected in some way by the implosion of the five big corporate credit unions. They got away with things that most credit unions could never dream of — things like investing billions of dollars in subprime securities, for no obvious reason. When that trade blew up, thousands of responsible small credit unions ended up being socked with enormous losses.

So when the chair of the NCUA, Debbie Matz, says that all of this is being done at no cost to taxpayers, that’s only partially true — there are millions of taxpayers who belong to credit unions, and all of them will be affected in some way, because collectively they own the institutions which are going to end up losing billions of dollars. And nobody along the chain could reasonably have avoided these losses: you suffer no matter which credit union you’re a member of, because the credit unions themselves had to belong to a corporate, and pretty much all of the corporates have failed.

The fact that all of the big five corporate credit unions have now failed is — or should be — a massive embarrassment to the NCUA, which was meant to be their regulator. What incentives were in place such that all of these entities ended up neck-deep in toxic assets, and such that their regulator didn’t stop them? Indeed, how on earth, in the wake of this fiasco, has the NCUA survived as an independent agency at all? It has failed the very credit unions it was meant to be protecting: its lax oversight of the corporates means that all of them have suffered substantial losses. Other lax regulators, like the Office of Thrift Supervision, were closed down by the Dodd-Frank bill. But the NCUA lives on, to dream up multi-billion-dollar good-bank/bad-bank securitization schemes. I wish it were a bit more accountable for its failures.

COMMENT

The FHLB system, beneficiaries (among many, actually) of the very direct $100 billion+ in TARP/government capital “invested” into Fannie Mae, and Freddie Mac. An investment unlikely to yield any true return, either.

Some banks in the FHLB system were better than others in managing the MBS portfolios, but still: owning a FNMA / FHLMC-issued, Agency MBS pass-through magically means your MBS bonds are not trading at $40-60 like the private label MBS kindred. Poof, make it so and it was.

Posted by McGriffen | Report as abusive

ShoreBank, RIP

Felix Salmon
Aug 20, 2010 23:32 UTC

Remember the ShoreBank rescue, back in May? Well, it got lots of headlines at the time, but it didn’t pan out in the end, and now ShoreBank has failed. The FDIC’s deposit insurance fund is taking a $367.7 million loss, and the money which was going to be invested in ShoreBank by Goldman, JP Morgan, Citigroup and others is now going to be invested in ShoreBank’s successor institution, Urban Partnership Bank. UPB will have a whole new management team, led by former Bank One executive William Farrow — something which rather puts the lie to conspiracy theories which said that Goldman et al were only investing in ShoreBank because its CEO was a friend of Barack Obama’s.

This clean-sweep approach makes a certain amount of sense: it’s right that ShoreBank’s shareholders should be wiped out when it managed to lose so much money. But it’s interesting to me that the government, given the choice between losing $368 million of the Deposit Insurance Fund or investing an extra $75 million in bailout funds, chose the former option. The deposit insurance fund, I guess, isn’t really considered taxpayer money, and will ultimately (eventually, hopefully) be repaid with future insurance premiums.

I wish Urban Partnership Bank well, and look forward to it proving that community-based urban lending can not only perform a crucial social function but can also be reasonably profitable. It’s sad that ShoreBank failed, but the main reason for the failure seems to have less to do with its community lending and more to do with its overexposure to speculative commercial real estate ventures. Urban Partnership Bank, I trust, will stick to its core competency, and do well for all concerned by doing so.

COMMENT

@ AABender1: incorrectish. The FDIC was supportive of using TARP funds, Treasury was unwilling to, because of political pressure. Glenn Beck et al picked up on it and turned it into a cause celebre. It required both the Treasury and FDIC acting in tandem, Treasury couldn’t.

@ Eric_H : Mostly incorrect. Shorebank would not have been closed by the FDIC had it received TARP funds, at least not in the short-run. Determining long term viability is of course challenging, but it is probable that Shorebank could have survived with additional TARP money. Not giving Shorebank money was for political reasons, not practical. Had the bank been anywhere other than Chicago, there would never have been issues in terms of government assistance.

Posted by David_Michaels | Report as abusive

The credit unions’ fight against interchange regulation

Felix Salmon
Jun 10, 2010 19:32 UTC

Yesterday saw an enormous lobbying effort from the credit union industry; John Magill, the chief lobbyist for the Credit Union National Association, told me that there were over 400,000 “contacts” with Congress this week. He was on the phone with Harriet May, the CEO of a big El Paso credit union, GECU, and the chairman of the CUNA board. She was trying hard to persuade me that credit unions are implacably opposed to regulating interchange fees, which she was prone to characterize as “government price fixing”.

I’m a fan of credit unions in general, but I’m suspicious of this lobbying effort. I’m on the board of directors of my local credit union, and I don’t think any of us are opposed to the Durbin amendment. May told me that some credit unions don’t care about this issue because they don’t issue cards — but we do, both credit and debit.

In any case, May’s main argument was that debit cards are expensive for credit unions, and that interchange fees help to offset that expense. “My debit card losses are high,” she said, “but they’re offset by the interchange”.

The problem was that she refused to say just how high her debit card losses were, beyond saying that she had to replace over 1,000 cards in the wake of the Heartland affair. Similarly, the official factsheet sent out by CUNA asserts baldly that “for most credit unions debit interchange currently covers somewhat more than the direct costs of providing debit services but is not disproportinate given their expenses and potential costs such as those relating to fraud”, without actually quantifying those costs.

When I asked whether the sensible response to fraud would be better security, through things like chip cards, rather than higher interchange fees to cover the ex post expenses associated with fraud, she said that she would welcome chip cards, and that she suspected that interchange fees would be lower if chip cards were introduced.

At the same time, however, she was at pains to point out that she wasn’t setting interchange fees, and that she wasn’t entirely clear on how Visa and Mastercard did set them: I would have to talk to Visa and Mastercard, she said, or to the Electronic Payments Coalition, to get a clear bead on how exactly interchange fees are set. As a result, she couldn’t or wouldn’t answer my simple question: since banks have proved themselves able to increase their revenues by raising interchange fees, what’s to stop them continuing to raise those interchange fees regardless of whether their costs are rising?

The fact is that the banks have worked out, over the past five years or so, that raising interchange fees is a great way of making money, more or less invisibly. As financial regulatory reform curtails their ability to make money in other ways, they’re going to look to interchange fees as a method of making up for revenue lost elsewhere — unless the Durbin amendment, or something like it, passes.

May’s stated reason for believing that U.S. interchange fees — which are already the highest in the world — won’t continue to rise indefinitely is that “merchants can work together with the card associations and we can work through it”. But the fact is that this is a game where the card associations very much have the upper hand: merchants aren’t allowed to group together in a negotiating bloc, and most of the time just have take-it-or-leave-it offers from the Visa/Mastercard duopoly.

What’s more, Senator Durbin himself has written forcefully to the CEOs of Visa and Mastercard, telling them in no uncertain terms not to disadvantage credit unions or other small issuers — who are specifically excluded from Durbin’s amendment.

So unless and until banks or credit unions can plausibly demonstrate that their debit-card losses are high and rising, I’m not going to have much sympathy with them. And I’m going to continue to believe that interchange rates are too high; that they should come down; and that absent any regulation, they’re going to continue to go up instead.

COMMENT

@wprosapiao, I share Felix’s sense of frustration about people talking past each other on this issue, I think your claim that “interchange RATES have not risen” is a great example.

Felix has even covered this in a past post, it’s simply inaccurate to claim that interchange fees haven’t risen: http://blogs.reuters.com/felix-salmon/20 10/01/05/the-interchange-fee-rip-off/

As much as people like to paint the interchange issue as being primarily about BIG business, or BIG banks, it’s about anyone (big or small) who issues cards or accepts them. This is a systemic issue that affects us all, and I’d argue it’s entirely appropriate to tackle it with financial reform.

In comparison to everything else being covered in the reform bill, are interchange fees really that complex?

Posted by oasisbob | Report as abusive

The Shorebank rescue

Felix Salmon
May 21, 2010 21:48 UTC

There’s a lot of conspiracy-theorizing going on around the high-level rescue of Chicago’s ShoreBank by Goldman Sachs, Citigroup, JP Morgan, Bank of America, and General Electric. The founder of the bank is BFF with BHO, and Chicago politics being what it is, everybody is assuming that the banks involved are expecting some kind of political quid pro quo down the road, for rescuing one of Chicago’s most-loved financial institutions.

I daresay they are. But on the other hand, it’s not nearly as implausible as everybody seems to think that America’s largest banks would step in to rescue ShoreBank. And to see why, it’s worth looking at what one of ShoreBank’s biggest critics, Tom Brown, has written on the subject.

Recession hasn’t been kind to ShoreBank. Inner-city lending is an iffy proposition even in good times. Once the credit crackup started, the company hit the wall hard: at the end of the first quarter, non-performers accounted for 13.1% of assets, while is Tier 1 risk-based capital ratio came to -0.1%. That’s right, negative. ShoreBank lost $106 million in 2009, and projects it will lose a total of $100 million in 2010 and 2011…

ShoreBank, we now know, has a business model that is fundamentally flawed…

ShoreBank lent so much money to people who didn’t pay it bank that the bank’s entire capital has now vaporized. The bank is broke! Its business model and its execution failed. If ShoreBank gets more capital, it will almost certainly make more bad loans and go broke again…

There are reasons most banks don’t do the kind of lending ShoreBank does. To see why, take another look at those capital ratios and NPA numbers. If you want to set up an entity to make provide high-risk, socially enlightened finance, fine. Set up a nonprofit and fund it with voluntary contributions. That’s why God gave us the Ford Foundation.

I don’t know where Brown is getting his figures, but I went to the FDIC’s website (it’s not easy to navigate, I’m warning you, but this link might be a good starting point), and got a bunch of numbers for ShoreBank for the 12 months ending March 31, 2010. Here’s the balance sheet, the performance and condition ratios, and the income statement; if you want the full 69-page call report, it’s here. The numbers are certainly bad. Noncurrent assets and REO accounts for 14.6% of total assets, but the Tier 1 capital ratio is at least positive, at 2.05%, with the bank having $26.2 million in Tier 1 capital remaining. And the total loss for the most recent fiscal year was $17 million, not $106 million.

Certainly, with hindsight, a lot of loans have gone bad. But it took them a while to go bad: it didn’t happen immediately “once the credit crackup started”, as Brown would have you think. Indeed, Dan Gross, in November 2008, held up Shorebank as a great example of a bank where the loans were not going bad — along with Lower East Side People’s, where I’m on the board, and where we’re doing fine without any kind of bailout at all. Not all community development financial institutions are financially dubious things which should only be funded by non-profits like the Ford Foundation, and America’s largest bankers agree that the underbanked deserve non-predatory financial services, rather than the check cashers, payday lenders, and similar institutions which lend only at usurious rates.

This, I think, is the real reason why the biggest banks in the US are stepping up to rescue ShoreBank. If someone pointed to LES People’s as an example of successfully serving the underbanked, that would carry only a certain amount of weight: our total assets are a fraction of what Lloyd Blankfein got paid in 2007 alone, and we’re in a unique situation, in Manhattan, which doesn’t apply to similar institutions nationwide.

ShoreBank, by contrast, is about 100 times larger than LESPFCU, and if the big banks can make it work, can stand as real-world proof that community lending really is a viable business model, and can scale successfully into becoming a profitable multi-billion-dollar institution. In the best-case scenario, the investors will help to turn ShoreBank around, will learn how to do what it does, and will then themselves become much friendlier towards their low-income customers, because they’ll know how to make money from them the good way — by helping them improve their finances and ultimately to become higher-income customers — rather than the bad way, which is to bleed them dry in a predatory manner.

All of the investors in ShoreBank will get a lot of CRA credit for their investment, which makes it very low-cost for them. By rescuing this storied institution they will help a lot of Chicagoans who need all the help they can get; they will learn how to improve their own products for lower-income customers; and they will help to transition the underbanked part of the US population into becoming banked, which is ultimately good for everybody. So while the cynical take on the deal is understandable, I’m not jumping to any conclusions quite yet.

COMMENT

Mega, yes, the demographics are very similar.

Posted by FelixSalmon | Report as abusive

What kind of image should a community bank project?

Felix Salmon
Mar 27, 2010 00:00 UTC

25banks_span-articleLarge.jpg

I’m very happy that the Lower East Side People’s Federal Credit Union made it into the photomontage the NYT used to illustrate an article on switching bank accounts — even if there was no mention of credit unions in the article itself. I’m on the board of LESPFCU, and we’ll take all the publicity we can get.

But looking at this montage, I do wonder whether our friendly-local branding might not make us the most attractive place to move one’s money, compared to all the slick alternatives, especially since we don’t offer perks for people opening new bank accounts, and we certainly don’t offer things like 4% interest on checking accounts for heavy debit-card users.

I’m not a fan of people switching to a bank because of some gimmicky here-today-gone-tomorrow promotion: switching bank accounts is hard, and I’m sure the idea behind a lot of these promotions is that once the 4% interest rate or whatever goes away, the customer will still keep the account.

But I’m also very much a fan of doing anything which can persuade people to move their money to LESPFCU, so long as it ultimately serves the predominantly low-income owners it’s my job to represent in board meetings.

When I asked Twitter whether they thought the LESPFCU branding in the montage was good or bad, Kat Aaron had nothing but nice things to say about us — but that was based on her real-world experiences there. Alea, by contrast, going just on the pictures, said LESPFCU would absolutely be his last choice.

I do think that while people like the idea of community banks in principle, they also want a certain degree of slick professionalism at the same time. Wonky hand lettering might be humanizing to those of us devoted to the credit union, but it can also make us seem amateurish to outsiders.

The good news is that our members come overwhelmingly through word of mouth, and always will do; once they get to know us, they understand why our signage is like it is. But it does stand out among other banks — and not necessarily in a good way.

COMMENT

Aesthetically, perhaps it’d be a bit neater if the word side was on the same line as lower and east.

——-THE——-
-LOWER EAST SIDE-
PEOPLE’S FEDERAL
–CREDIT UNION—

The street art motif suits the neighborhood and recalls the signage of nearby community art center ABC No Rio. But I’m perplexed by the content of the art. From what little I can make out, the foreground slightly resembles a lunar landscape.

Posted by Sandrew | Report as abusive
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