Former Senator Pete Fitzgerald (R, Ill.), Barack Obama’s predecessor in the Senate and today chairman of a community bank in McLean, Va., spoke this afternoon at Washington D.C.’s Cosmos Club on the banking crisis. His main point was that banks today are dangerously illiquid, and that federal regulators’ actions of today are doing nothing to improve that situation.
Citing FDIC numbers, he noted that in 2007 the average bank in the United States had loaned out 112 percent of its deposits. That is to say that if a bank had $1 billion in deposits, it had $1.12 billion in outstanding loans, and was borrowing (usually from the Fed) to keep cash on hand for depositors. (Fitzgerald showed us his bank’s balance sheet — it has loaned out under 50 percent of its deposits, a conservative practice that obviously comes at a price.)
Fitzgerald noted that there is no specific requirement for bank liquidity in the United States, whereas Canadian banks are required to stay at least 25 percent liquid. “In my view, this is a big issue that bank regulators are missing.” But the government does not want to demand an increase in liquidity now because it would result in banks shedding loans, and the government wants more credit to be made available. “The government has been bordering on the irresponsible by trying to make these banks make more loans,” he said. TARP money has made banks more liquid in the short run, but it has also put a lot more debt on their books. As they continue to loan out a high percentage of their deposits, their liquidity will decrease but the debt will remain.
He also discussed the FDIC’s role in bankers’ reckless behavior. Long ago, he said, banks could attract depositors by publishing their balance sheets to show that they were not engaged in risky practices. Today, no one cares what their bank is doing. It’s FDIC insured, and so depositors can completely ignore reckless bank practices.
“I think it was a mistake to raise the insured limit from $100,000 to $250,000,” he said. It rewards the reckless banks, and that means you’ll only have more recklessness.”