Citigroup recently informed the majority of it's checking account customers that it reserves the right to require seven days notice on withdrawals. Does this mean Citi is fearing a run on the bank?
Citigroup (C), that large banking behemoth that we have all come to love, recently sent out a notice to its checking account customers informing them of new changes to the rules associated with withdrawals of deposits.
The notice states that Citi has the right to require account holders to provide advance notice before withdrawing any money on their accounts. As per the notice, Citi says, “Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change”.
To any thinking man such a change has two adverse effects. The first is that I cannot withdraw my money in an emergency and may have to wait for it for seven days, should Citi decide to exercise this option, while the second could be more sinister – is Citi looking to restrict the amount of cash it can lose on any one day if ever there were to be a good old-fashioned bank run?
It’s not such a far fetched idea. Citi has only recently emerged from a massive government bailout which saw the United States take a majority stake in the company. Citi lost about 92% of it’s market capitalization since that period and the government still holds its equity stake. The firm was essentially worthless and would have collapsed had it not been for the government intervention that occurred. Had such an event materialized, Citi checking account owners would have flocked to the bank demanding repayment of their checking account funds, thereby worsening the situation and forcing Citi into bankruptcy even sooner.
The new regulations allow Citi to avoid this scenario by making clients wait seven days in the worst case scenario. Such protection is good for the bank but obviously bad for the customer.
Citi itself has said that the notice is just a technical requirement imposed by the FDIC as part of banking law changes that happened when that institution started offering unlimited account protection last year. It’s also worth noting that not only Citi falls under these new regulations and is not the only bank to have sent out “scary” notices. The changes have also occurred at Bank of America (BAC) and JP Morgan (JPM), amongst many other banks.
While there’s no need to be alarmist and stuff your money under your mattress, be warned that banks have numerous legal rights and caveats to keep your money for longer than you might anticipate.
In the Fed's semiannual report to Congress, Chairman Ben Bernanke reiterated that rates will stay low for an extended period. How long is an extended period? Certainly through 2010 and perhaps longer in my opinion.
Here's what Bernanke had to say in his prepared statement:
“Although the federal funds rate is likely to remain exceptionally low for an extended period, as the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures."
In other words, rates are staying rock bottom until the economy shows that it has some life. And that certainly hasn't happened recently. In his remarks, he said that much of the pick-up at the end of last year was attributed to companies repleneshing inventories and not due to an increase in demand.
“As the impetus provided by the inventory cycle is temporary, and as the fiscal support for economic growth likely will diminish later this year, a sustained recovery will depend on continued growth in private-sector final demand for goods and services,” he said.
There were a couple of very interesting and almost humorous exchanges, humorous in a pathetic way. Ron Paul, the arch-nemesis of the Fed insinuated that the Fed had helped finance the 1972 Watergate break-in as well as bankrolled Saddam Hussein. Bernanke replied:
“The specific allegations you have made are absolutely bizarre. I have no knowledge of anything remotely like what you’ve described.”
Both the allegations and the response made me chuckle.
And then I also sat and watched as Congressmen and Congresswomen botched basic economics, confusing the Discount Window with the Federal Funds Rate. One representative (a woman whose name I did not catch) kept pressing Bernanke to release the names of banks who borrowed from the Discount Window in the name of transparency. That of course, would defeat the very purpose of the Discount Window,which is to help stave off a financial panic. What bank is going to borrow if the fact they are borrowing becomes public knowledge?
It's sometimes scary to listen to the testimony and realize just how little our legislators understand how the financial system works.
The number and total assets of problem institutions on the FDIC 'Problem List' continued to grow at the end of 2009 as banks charged off even more bad loans than in 2008.
At the end of December, there were 702 insured institutions on the "Problem List," up from 552 on September 30. In addition, the total assets of "problem" institutions increased during the quarter from $345.9 billion to $402.8 billion. Forty-five institutions failed during the fourth quarter, bringing the total number of failures for the year to 140, the highest annual total since 1992.
In its quarterly report on bank health,the FDIC noted that indicators of asset quality continued to deteriorate during the fourth quarter, although the pace of deterioration slowed for a third consecutive quarter. So, the first derivative is less now than it was at the beginning of 2009. Still, asset quality if still declining. Insured banks and thrifts charged off $53.0 billion in uncollectible loans during the quarter, up from $38.6 billion a year earlier, and noncurrent loans and leases increased by $24.3 billion during the fourth quarter. At the end of 2009, noncurrent loans and leases totaled $391.3 billion, or 5.37 percent of the industry's total loans and leases.
The one bright spot was bank earnings. Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $914 million in the fourth quarter of 2009, a $38.7 billion improvement from the $37.8 billion net loss the industry sustained in the fourth quarter of 2008, but still well below historical norms for quarterly profits. More than half of all institutions (50.3 percent) reported year-over-year improvements in their quarterly net income. Almost one-third of all institutions (32.7 percent) reported net losses for the quarter, compared to 34.6 percent a year earlier. For the full-year, banks reported net income totaling $12.5 billion – up from $4.5 billion in 2008.
Of course, it would have been impossible for banks not to earn money with the yield curve the way it has been. Banks can borrow cheap and lend out at higher rates. The Fed has intentionally done this to reinflate banks and it seems to be working.
Bad assets remain on the books though. I have a friend who is a banker and he says that commercial real estate is still very ugly. A lot of banks have not sucked it up and recognized their losses so there is still pain ahead.
