Last October, CIT Inc., a troubled, if massive financial services conglomerate, decided it would get hip and launch an online bank at www.bankoncit.com. So far, the performance has been so-so.
Yesterday, CIT disclosed that the bank has generated about $600 million of deposits since its launch. In the bank’s view, that’s a positive number. John A. Thain, CIT’s chairman and CEO, was asked yesterday during an earnings call whether the $600 million run rate would continue, or even go higher. His response:
Well, I think the way to think about it is it did just start in October, and so there is a certain amount of getting up to speed and a certain amount of just education in terms of getting our name out into the marketplace. I think we said before that the — we believe that we can raise substantial amounts of deposits on the Internet, and you can look at some of our other competitors who have done that in the multibillions of dollars. When we have as much cash as we do have in the bank, as well as the student loans, there’s not much pressure for us to try to push to raise too many more deposits right at the moment.
Deposits at the bank are costing CIT 160 basis points with an average term of three years, which isn’t bad. But CIT’s progress so far does not come close to the king of all online banks, Ally. Granted Ally started from a greater base, because it had long operated a consumer bank as GMAC. When Ally rebranded in early 2009, it had $23.9 billion of deposits, a good portion of which were brokered. By the end of 3Q11, that amount hit $44.3 billion. (Ally’s fourth quarter 2011 earnings will be released within the next few days.)
Is it fair to compare CIT to Ally? Maybe not because of the GMAC Bank legacy. However, the $600 million of deposits, while a large number (heck, I don’t have $600 million), represents not even a measurable slice of the online banking deposit mark, as well as CIT’s potential share. Stay tuned, folks.
Here is an interesting take on the proposal to raise the FDIC limit to $250,000. I think it spells out the limited upside beyond the purely psychological and probably short lived efect of doing this.
Tim
Raising Deposit Insurance Has Limited Upside
By Karey Wutkowski – Analysis
WASHINGTON (Reuters) – Raising the U.S. federal insurance limit on bank deposits to $250,000 might give a psychological lift to battered financial markets, but it would benefit only a small slice of individuals and businesses and do little to unfreeze credit markets.
The Federal Deposit Insurance Corporation Chairman Sheila Bair said on Tuesday the agency should have the temporary ability to raise deposit insurance limits, saying it would provide banks with more liquidity for lending and reassure depositors. The FDIC, created after thousands of bank failures during the Great Depression, has seen its role expand dramatically in recently and has started brokering deals to arrange the sale of major banks.
Both presidential candidates, Democrat Barack Obama and Republican John McCain, called on Tuesday for lifting the limit on bank deposits guaranteed by the federal government to $250,000.
“Frankly, I think it plays better as rhetoric than as reality,” said Ann Graham, a former FDIC official, who is now a law professor at Texas Tech University.
Investors who hold more than $100,000 in savings are usually savvy enough to structure their deposits in various $100,000 blocks spread across different accounts and banks, Graham said.
The higher limit would help small businesses that maintain deposits for payrolls that fall between $100,000 and $250,000, a relatively small group.
“It might have a lot of psychological value, but the real benefit is limited to a relatively small sliver of small businesses,” said Mark Flannery, a University of Florida finance professor. “I don’t think it helps very much at all with the credit seizure and market turmoil coming from the asset side.”
The FDIC now insures up to $100,000 per deposit account and up to $250,000 per retirement account at insured banks. The agency’s war chest to protect more than $3 trillion of insured deposits stood at about $45.2 billion at the end of the second quarter.
U.S. banks have been under pressure in recent months as poorly performing subprime mortgages weighed down balance sheets, triggering rating downgrades and increasing the risk a crisis of confidence would cause a bank run.
Amid the turmoil, the FDIC has taken on new prominence. In just the past week, it helped arrange the sale of Washington Mutual to JPMorgan Chase & Co (JPM.N: ) and the sale of Wachovia to Citigroup Inc (C.N: ), as depositors fled those institutions.
Now some policymakers are looking to the FDIC for a quick fix they say could boost the confidence of Americans in the banking system.
Obama said in a statement on Tuesday that raising the insurance deposit limit could “broaden support for the (bailout) legislation and shore up our economy.”
McCain told CNN on Tuesday that he spoke to President George W. Bush in the morning and recommended the limit be raised to help protect bank deposits.
MORE BENEFIT OR HARM?
John Douglas, a former FDIC general counsel who is now a partner at law firm Paul Hastings Janofsky & Walker, said raising the deposit insurance limit could create a greater moral hazard.
Keeping the insurance limit at $100,000 — an amount set in 1980 — imposes market discipline by making investors who maintain deposits above that level investigate the soundness of their bank, Douglas said.
“If I were at the FDIC, I would have mixed emotions because it allows more funds to go into weak banks,” Douglas said.
Also, raising the limit could put more pressure on a stressed industry by forcing banks to pay higher premiums for insurance.
“Nobody should think that for nothing, you get something,” said Alan Blinder, an economist at Princeton University and a former vice chairman of the board of governors at the Federal Reserve. “Banks will have to pay higher insurance premiums and, for some of them, there will be more cost than benefit.”
A banking industry group said raising the deposit insurance limit was a complex issue that needed more study. Floyd Stoner, an executive director at the American Bankers Association, said a temporary change would give regulators a chance to examine the impact.
But any measure to increase confidence of Americans in the safety of their savings does not get at the real problem causing banks to fail — the bad loans and financial products related to subprime mortgages.
Douglas said it is not the flight of depositors with less than $250,000 that cause a bank to become insolvent. Rather, it is the large corporations and hedge funds that have $10 million in deposits.
Raising the insurance limit to $250,000 will not prevent those depositors from fleeing when it becomes clear a bank’s balance sheet is deteriorating.
“It doesn’t have anything to do with the underlying problem with the quality of the assets,” Douglas said. “Banks may fail anyway.”
The new attention on FDIC insurance limits came one day after the U.S. House of Representatives rejected a $700 billion Wall Street bailout, sending the stock market plummeting 777 points — a record one-day point loss.
(Editing by Andre Grenon)
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