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.