When times are tough, refer to a John Wayne movie!
Ok, this may be the long way around the barn, but stick with me...
Utah Banks are O K. !!!
Who remembers the movie "Stagecoach"? Not the cheesy one from '67 (although anything with Ann-Margaret is worth watching), but the original John Ford classic from 1939?
Most of us remember the story of the Ringo Kid (Wayne) traveling to Lordsburg to avenge the murder of his brother.
How many of you remember one of the side plots about the banker stealing money from his own bank and heading out in the same coach? The banker was an annoying windbag, but he had a line that has stuck with me since I first watched it with my dad years ago. He was talking to a courier at the time when he said
"What's good for the banks is good for the country". Now, I know that we've been fighting with the banks for years now, (mostly because we can't always agree with what they say is good for them!) but I received an email message from the Utah Bankers Association yesterday that I can get behind. It's been apparent to me for a long time that the average Joe doesn't have a clue what makes a bank work. The national media has not been very good about helping of late either.
Banks need two basic things to operate correctly: Capital and liquidity.
Capital is the foundation it's all built on. FDIC insured banks are required to keep a minimum amount of capital reserve in relation to loans. Many banks keep profits to build more capital. The bankers email compared this to an immune system. The more capital in relation to loans, the stronger the immune system. Most banks, especially here in Utah have very strong immune systems.
That brings us to liquidity. This is the money banks use for loans, as they must match loans with deposits. Without deposits, banks have no way to leverage their capital to make loans, which in turn stimulates the economy.
The IndyMac disaster in California illustrates what happens when you have people with access to a microphone, but no understanding of how things work making statements. Yes, IndyMac was having a tough time, but they had adequate capital, and were actually working with regulators to correct the damage that some bad loans had done to them. It had a great chance of actually working until a statement by a U.S. Senator caused depositors to panic, undermining that liquidity. How much so? How about a billion in deposits taken out in a week, despite the fact that most of these deposits were insured. The bankers likened it to a patient suffering from the flu dying of a sudden heart attack.
The fact of the matter is that after years of good earnings and minimal losses, banks are lot better prepared for the issues we're dealing with than they were back in the '80s and '90's.
Those of us in Utah may be in even better shape. Since Utah didn't really party during the housing boom, our hangover should be less painful as well. Those of us with deposits in FDIC insured banks should rest easy with the strong levels of capital banks have built in. Banks will be able to provide good sound loans that will keep the economy moving so that we can correct the current downturn (as long as Congress doesn't screw it up!). Who ever thought a Realtor would agree with a banker? I always knew John Ford was a genius!