Shifting Deposit Currents: During the Financial Markets Crisis, Community Banks Gained Deposits but Face Margin Compression

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Many everyday banking consumers have redis-covered community banks during the financial markets crisis, says Ken Gibbons, president and CEO of Union Bank in Morrisville, Vt. Deposits at the $440 million-asset community bank jumped 7 percent during the last six months of 2008.

Union Bank's deposit growth was generated by consumers taking their money out of accounts at troubled large banks, investment banks, brokerage houses and money market funds, Gibbons says. "Consumers are less rate-driven and more concerned about keeping their money where it will be safe. Well-capitalized community banks look good to them."

Welcome to the rapidly changing world of the bank deposit market-place. The faltering economy and the flurry of government bailouts have disrupted a deposit market affected by all sorts of crosscurrents. The high-profile collapses of financial institutions along with plummeting stock market and real estate values have set off an investor flight that brought the yield on short-term U.S. Treasury securities to virtually zero last fall. And as the reputations of many large banks have been tarnished, those of community banks in general have been enhanced, as community banks have been seen increasingly as havens of stability. This contrast has led to growth in community bank deposits.

Initially, some jittery banking consumers who had been bringing in large sums of deposits to FDIC-insured accounts for safety were spreading their money among more than one bank, reports Roger Cummings, president of the $255 million-asset Alliance Bank in Francesville, Ind. When Congress raised the FDIC insurance limit to $250,000 per customer, depositors settled down, he says. "People stopped worrying. That helped calm their nerves."

"We've seen a lot of activity and a net increase in deposits," reports Jack Goldstein, chairman and CEO of the $245 million-asset MBRS Financial Bank in Rising Sun, Md. "It's coming from larger banks and securities firms. Both our retirement accounts and our money market accounts are up."

Anxiety, Goldstein says, is increasing the demand from financial consumers for local, hands-on service and trusted, conservative banking practices. "They want to deal with people they know, not outsiders," he notes.

Whatever small amount of money flowing out of community banks that is not going into money market mutual funds is being used to pay bills or, in some cases, to buy real estate, which has fallen to what some investors consider bargain prices, Goldstein reports. Some deposits are going into checking accounts that don't pay interest, but the most popular deposits are CDs longer than a year, he explains.

Government Interventions

Another factor that contributed to the shift in the flow of deposits was the Treasury Department's announcement in September that it would temporarily guarantee investments in money market mutual funds, community bankers report. The Treasury guarantee of MMMFs, if left open-ended, would have wiped out the safety advantage enjoyed by FDIC-insured deposits. But ICBA moved quickly to have the Treasury limit insurance coverage of balances only to accounts that existed as of the close of business on Sept. 19, the day the government acted to insure those accounts.

Then, in October, the Emergency Economic Stability Act of 2008 virtually overnight increased the insurance limit on deposits in FDIC-insured institutions from $100,000 to $250,000 per customer through Dec. 31, 2009. The law also provided the possibility of unlimited insurance coverage for commercial deposits in non-interest-bearing accounts. And it included ICBA's recommendation to prohibit the Treasury from establishing future guarantee programs for money market mutual funds in order to keep the playing field competitive for community bank deposit accounts.

Because the increases in FDIC insurance coverage levels and the guarantees behind money market funds are temporary measures, the long-term impact of those increases would depend on what coverage policymakers allow to expire and what coverage they might make permanent, notes Karen Thomas, ICBA's executive vice president, director of government relations. …