Zombies Draining Deposits from Healthy Banks

 |  Includes: CIT, GKM, GMA, KBE, XLF
by: Linus Wilson

The WSJ reports that the FDIC is planning to put a cap on the rates under capitalized banks are offering on deposits. This is a good idea. The only puzzle is, “Why have regulators not been doing this already?”

The FDIC proposes to limit zombie banks to offering no more than 0.75 percent over the national average for deposits. Banks on their last legs routinely use the FDIC guarantee and high interest rates to siphon CDs and deposits from healthy banks. Depositors don’t care because they won’t lose any money as long as the deposits are FDIC guaranteed. Then the zombie bank turn around and loan out those deposits on the most speculative ventures they can find. When the 100th strip mall in Boca Raton, Florida can’t find tenants, those loans go bad and the FDIC picks up the tab.

The twice bailed out GMAC LLC the parent of Ally Bank won’t get to pay 76 basis points above the national average come January 1, 2010. Nevertheless, why should they be allowed to offer deposit rates above the national average at all. Another finance company, CIT Group, which is in Chapter 11 bankruptcy, was limited by regulators from taking in new deposits through its banking arm. The federal government has too much discretion to decide which banks live and which banks die. I’m afraid that healthy banks and taxpayers will have to ultimately pay for the lax regulation of GMAC.

Disclosure: I own broad-based index funds.