Archive for March, 2009

Banks – A Simple Plan…

Thursday, March 19th, 2009

The recent market move to the upside was kindled by the revelation that banks were actually able to make profits if they followed a simple plan… They take in deposits at a low cost of funds, and they make loans priced at a higher price of funds, keeping the spread.

This scenario has been helped by the Treasury and its aggressive moves to keep short term interest rates low. The steepened yield curve has been the best ammunition to combat the inexorable march toward the battlefield of deflation, which similar to trench warfare, has no winners.

Maybe this is why over two thirds of community banks continue to be profitable even through the darkest of our current times. Banks like North Jersey Community Bank, which take in deposits from the surrounding communities, and with local knowledge and prowess, make qualified loans in those same communities, at a profit. Those loans have helped start businesses, expand others, create new job opportunities, and help build the neighborhoods that many dream of living in. It has created more economic stimulative than any government financed initiative could ever hope for.

Now that we have been given a glimpse of the psychological, economic and structural goodwill that can be brought by supporting our banking system, we need to focus on how to keep that “Simple Plan” alive.

Mark-to-Market: The SEC and the Financial Accounting Standards Board need to move expeditiously to reform the mark-to-market accounting rules which are needlessly removing capital from banks which have held-to-maturity assets, which are performing, but cannot be priced because the market is frozen. Kind of like trying to find a buyer for a gold bar amongst the passengers of a sinking ship, and not finding any, declaring the value to be zero…  After the survivors are rescued, the salvage efforts are completed, and the gold bar found, has the value been restored?

FDIC Assessment: Similar to mark-to-market in that the application of this assessment has the effect of draining capital from banks at exactly the time they need it most in order to support their balance sheets and continue to lend. For each dollar of capital that a bank has, it can comfortably make twelve dollars worth of loans, and take in twelve dollars worth of deposits, making a spread to create a profit. This ill conceived plan would assess banks an extraordinary “insurance fee” just at the time when they could least afford it, and all because of semantics. The claim that the FDIC is running out of money, when in fact it has no bank account of its own, and is merely a line item on the Federal Budget, is absurd, politically charged, short-sighted, and outrageous.  This plan must be stopped, rethought, and reconsidered. It is the consumer who will pay the price, with less lending, and lower yields on deposits.

TARP Funds:  To those banks that are like ours, being well capitalized, profitable, and possess a well thought out business plan, taking TARP is an assault to our capitalist system and goes against the grain of the entrepreneurial spirit.  For those banks that have been weakened by a temporary setback, and need assistance to support their capital structure, TARP can play a significant role in their stabilization. But, for those banks that entered these times with a weak plan, and are being ravaged due to their inability to compete effectively, TARP has the undesirable effect of creating government supported walking zombies that only dampen the fire that needs to burn to stoke this economy back to health.

By providing some additional fuel to the most basic of all economic businesses, that is “banking,” the economy will begin to recover, good sense lending will return, and private investment will once again place value on an industry that works with “A Simple Plan.”