NorthWesternFinancialReview.com Blog

Here is a healthy dialogue taking place among residents of Northfield, Minn., a vibrant community about 45 minutes south of the Twin Cities. The main point of discussion concerns the degree of transparency under which banks should operate. There are some participants in the discussion who say the local banks should be more forthcoming and there are those who say the banks have been sufficiently communicative.

Let’s remember that banks already are one of the most transparent businesses out there. Very detailed information is published quarterly about every FDIC-insured bank in the country. Those numbers reveal a lot, and in fact, at NorthWestern Financial Review magazine we use those numbers all the time to cover the industry. Furthermore, publicly-held banks are subject to additional disclosures required by the SEC.

I would argue, however, that banks deemed too-big-to-fail should be subject to an even greater level of tranparency. If taxpayers are on the hook, we have a right to know what’s going on at the bank on a day-to-day basis. That means public access to loan files and the investment portfolio. The public should be able to see what kinds of risk the institution is taking, both in the form of lending and in the form of other investments.

You cannot make the same argument for community banks, however. If Citibank gets into trouble, there is an impact on the taxpayer. If your local bank fails, there is no impact on taxpayers. This is an important point. When a small bank fails, no one with deposits of $250,000 or less lose any money. In many cases, even if deposit accounts exceed that amount, the depositor retains the entire account balance. The FDIC handles failed banks and the cost is charged completely to the deposit insurance fund, which is industry-funded. It is not taxpayer funded.

Even now, when the FDIC fund balance is technically negative, it is important to realize there is a lot of money in the fund. A reserve within the fund is established for projected future losses. The reserve balance is subtracted from the fund balance, so the actual balance of the entire fund is higher than the reported balance. Furthermore, banks prepaid three years’ worth of insurance premiums on Dec. 31, 2009; standard accounting practices prevent the FDIC from booking that money as income right away, although the money is available right away. The point is, the failed bank resolution process is entirely industry-funded for banks that are not deemed too-big-to-fail.  

So while I cannot think of a public policy reason smaller banker should be required to make greater levels of disclosure, I do think the managers of those institutions have an interesting question on their hands. How much should they disclose about the condition of their bank? Each manager is likely to come up with their own answer; some might choose to reveal more than the requirements of the Call Report, and others might choose to reveal nothing more. Customers might react differently to each choice; clearly, anticipating customer reaction is one of the key factors bank managers would have to take into account when making such a decision.