Before I started kindergarten, my mom took me to the local branch of what was then the First National Bank of Akron. I was able to open a savings account with five dollars. A couple of times a year we would go into the bank to deposit any money I got from shoveling snow or raking leaves, and they would post the deposit and the interest into my passbook. For those of you who remember, it looked something like this…
When I was 11 years old and wanted to get a 10-speed bike, my dad told me in no uncertain terms that if I wanted a bike, I needed to get a job. This led to me becoming a paperboy for the Akron Beacon Journal. The newspapers were delivered after school. You had to buy your newspapers from the publisher. You collected weekly from your clients. The difference between the two was your profit. Once or twice a month, I would take the profit from my paper route and deposit it in my bank account. The nice thing was that the tellers knew you when you walked into the bank. They called you by name and they genuinely seemed to want to help you.
When I was 19 years old, I took a job as a bank teller at the local Huntington Bank branch on the Kent car strip to help pay for my college. That branch served the employees of many of the businesses, including the car dealerships nearby. There was an emphasis to know your customers and call them by name. That way you did not have to ask them for their driver’s license for ID verification purposes each time they came in. Our branch manager knew our business owners and truly tried to help them manage and grow their businesses. Those days may be going quickly by the wayside.
This kind of local bank customer service may be ending soon. As you can see from our first chart below, courtesy of Liz Ann Sonders, Chief Economist at Charles Schwab, the number of small, locally owned banks started steadily declining in the 1990s. However, there were still many new bank charters, meaning someone was starting a new bank, each year until the 2008 Great Financial Crisis. The incident grew out of the subprime mortgage calamity, and it ultimately led to the government takeover of Fannie Mae and Freddie Mac, and the failure of AIG and Lehman Brothers.
The banking system in the United States is somewhat unusual. Historically we have had many small, locally-owned banks. Many countries around the world, including most of our friends in Western Europe, have a smaller number of large commercial banks that are often highly regulated. Based on the downward trend and red line in the chart above, it appeared that our system has been moving in that direction over the last 30 years.
The events since early March, where the FDIC had to close two banks, have caused this existing trend to accelerate. As you can see in our next chart, deposits at large banks, deemed to be systemically important, are growing. At the same time, deposits in small banks are seen to be shrinking.
The Federal Reserve Bank, the Treasury Department, and the FDIC all collaborated to make certain that ALL depositors at these large banks were going to be backed fully, regardless of the FDIC insurance limit. This seemingly implicit guarantee has only been approved for the depositors of these large banks. Many people with amounts above the FDIC insurance limit of $250,000 in smaller or community banks are nervous they would not get the same treatment from the government and are voting by moving their deposits.
Many people are also moving deposits from banks, which are subject to the FDIC insurance limit, to other vehicles such as treasury bills, money market mutual funds, and short-term bond funds. These vehicles primarily invest in very short-term treasury and high-grade corporate securities. They are also paying rates of return higher than we have seen in nearly 20 years, meaning there is finally an alternative for people to consider. This has led to record amounts of deposits being held in money market funds today.
It may be that small-town banks where everybody knows your name and there is a premium on customer service may soon be a thing of the past. We are uncertain how this trend will play out, and whether recent developments will cause the number of banks across the country to shrink even more rapidly. This is something we are watching closely.
We thought it was a trend worth bringing to your attention. There are many options to consider when looking for a place to deposit your excess funds, whether it comes from your paper route or some other source. Of course, if you have questions about your unique situation and the options available, please reach out to your Certified Financial Planner at Impel Wealth Management for guidance. We are here to help you as we continue “Moving Life Forward”.
© 2023 Jesse Hurst
The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.