Bankers versus Savers
June 03, 2009
You probably did not see it mentioned in your local newspaper, but the American Bankers Association (ABA) made news last week when in a letter addressed to the FDIC they publicly chastised Ally Bank. The problem? Ally Bank has been offering deposit rates that are too high in comparision to the rest of the banks in the country. That bank really has some nerve, according to the very strong and vocal bankers association.
The argument against high deposit rates from banks considered weak is that all Americans will end up paying the cost of the bank's folly when they fail. The bankers, in particular, are upset because they have to pay premiums to the FDIC to help share the costs of returning depositor money at banks that have been closed down by regulators. Ally Bank responded to the attack with their own press release which said in essence, "Mind your own business, bankers." So who is in the right in this dogfight?
We all know by now that poor banking decisions exist. Billions of dollars of bad loans written off by financial institutions have told us that. It is also certainly true that some banks do offer high deposit rates in a desperate attempt to chase money after their loans start going south. But it is not the ABA's business to regulate weak banks. It is the job of the FDIC and state regulators to monitor banks. Savers should side with Ally Bank on this disagreement. Laws are already in place to limit the damage that under-capitalized banks can wreak. Even with the relatively large number of bank failures in 2008 and 2009, hundreds of banks considered weak are slowly improving their balance sheets and helping their local economy. Paying high deposit rates has helped some of these banks recover. We should not stifle competition between banks that offer high rates to savers just because a few bankers are grumpy. The ABA is looking out for the interests of the banks that pay the paltry rates of below 1%. The banks with rates too low to be interesting to friends of MoneyRates.com. If the ABA is allowed to reel in an aggressive bank like Ally Bank, then online banks and small community banks could be next. For savers, that means lower rates and higher fees. Don't let the ABA get away with it.