Local bankers call national bailout measures necessary but worrisome

For Missouri Commissioner of Finance Eric McClure, the fallout from the national financial crisis hit home March 7, when he closed a community bank in a small town outside of Kansas City.

Hume Bank, which reopened as a branch of Security Bank, was one of 16 banks that failed during the past nine months amid the national financial crisis, after three failures in 2007 and none the previous two years.

“If people had more than $100,000 in their accounts, they lost money,” McClure said during a forum on banking held Tuesday. “It was heartbreaking. They were real people with real money, real families and real stories.”

It wasn’t fair, McClure said, that Hume Bank was allowed to fail while depositors didn’t lose a dime at Wachovia Corp. and other national financial institutions deemed “too big to fail.” “It’s not fair for our community banks to compete against these banks that are bulletproof,” he said.

The government’s bailout plan, however, has ensured that federal deposit insurance will cover losses if a bank fails in the foreseeable future. Congress raised the FDIC deposit insurance limit from $100,000 to $250,000 and to loosen credit markets, the federal government injected $125 billion in the nation’s largest banks and the same amount spread among smaller banks.

A few hours before McClure joined local bank executives and university experts at the Tiger Hotel to discuss the impact of intervention, the government extended the federal deposit insurance to essentially cover all small-business deposits.

The banking industry was weakened by gigantic losses on home loans, and the credit crisis was putting a freeze on bank-to-bank lending. Forum participants warned that the bailout plan and protective measures could stoke inflation, increase lending costs and reinforce the bad policies that got the financial system in this mess in the first place

But they also generally agreed the intervention was necessary because of the pervasive fear about the condition of banks and the state of the entire financial system, even though local banks are relatively well-off.

“People are shaken and (asking), ‘how safe is our money,”’ McClure said.

“We have an awful lot of customers who are asking how safe is their money,” said James Schatz, chairman of Commerce Bank.

“We get calls from customers every single day,” said Judy Starr, chief financial officer at Boone County National Bank, adding that many of the questions focus on more specific issues such as interest rates, collateral and liquidity.

While it’s business as usual for banks to ask potential borrowers to disclose their financial health, borrowers for the first time are beginning to ask “about the individual conditions of the banks,” said Craig McGonagle, President of UMB.

Now that the federal government is insuring bank assets, injecting cash into banks and taking over distressed assets related to the housing crisis, McClure said banks are even more attractive as a home for their money.

“There aren’t many places you can put your money now where you can say you have zero to worry about,” he said.

Most banks in the Columbia market have had decreases in deposits this past year, or “anemic growth in deposits” in the words of Bank of Missouri President David Keller.

Forum participants said local banks likely will see increases in their deposits because of the government intervention.

But at the beginning of the forum, McClure stressed that Missouri banks already were relatively stable. “Our community banks are well capitalized,” he said. “They’re still making money and lending money.”

Assets in state-chartered banks were up 9.6 percent on June 30 compared with that day last year, deposits were up 8 percent and total loans increased 9.4 percent. However, net income in state banks was down 46 percent and return to assets was 0.53 compared with 1.07.

Keller said because of the housing crisis, primarily, “Banks throughout the state are having higher rates of non-accruals and past due amounts. We’ve all enjoyed a local bubble. Many of us now have builders and developers in our portfolios who are seeing duress.”

Keller said the extent of the underlying problem has not yet surfaced, and he added that if conditions do not improve in the next 18 months, “things will worsen in that regard and those numbers will increase.”

The government’s effort to ensure conditions improve carries risk, forum participants said.

Andy Puckett, an assistant professor of finance at the University of Missouri College of Business, said the current situation, with the country in a recession or on the brink of one, is similar to that in 1974 when money was being pumped into the economy. The gross domestic product was steady, but prices rose because the government kept printing more money.

“The very big hidden danger here is that we are going to have this insidious inflation effect after all these decisions that have been made over the past few weeks,” McClure said, adding that inflation “is an insidious tax on all society.”

McGonagle said the government bailout plan “reinforces those folks who made bad loans, saying it’s business as usual. We’ve wiped the slate clean for you, get right back there and get those markets churning again…. It doesn’t address the real, underlying problem that we are too leveraged as individuals, businesses and society. The bailout plan is only shifting the problem from the banking system over to the government.”

“It’s going to take a long time to spend down that debt.” Keller added.

Schatz said the bailout plan is a “stopgap measure to bring confidence back into the banking industry.”

McClure and others said the government’s decision to cover all bank deposits sets a dangerous precedent.

“It’s going to be hard to put the genie back in the bottle,” McClure said.

Power Lunch Participants

PRESENTER:

• Eric McClure, Commissioner, Missouri Division of Finance

GUESTS:

• Anne Echelmeier, Investment Representative,

Edward Jones

• John Howe, Missouri Bankers Chair,

MU College of Business

• Rodger Howell, Vice President, UMB
• David Keller, President, Bank of Missouri
• Craig McGonagle, President, UMB
• Gary Meyerpeter, President,

Callaway Bank-Boone County

• Andy Puckett, Finance Dept. Professor

MU College of Business

• James Schatz, Chairman, Commerce Bank
• Judy Starr, CFO, Boone County National Bank