Bank depositors stay calm amid turmoil

MOST AMERICANS have never been closer to a bank run than watching one in movies such as "It's a Wonderful Life" or "Mary Poppins." The existence and extensive marketing of federal deposit insurance, and the quick resolutions of problems by federal regulators, leaving depositors whole, have for many made worrying about money in the bank a nonissue.

But there are others for whom reading the headlines about the banking and mortgage industry's current woes are enough to prompt questions and concerns.

In recent weeks readers have called and e-mailed with increasing frequency, asking, "Is my money safe in Washington Mutual? What happens if the company gets bought? Should I keep my money there?"

The answer is emphatically yes, your money is safe, no matter what happens. The Federal Deposit Insurance Corp. guarantees deposits up to $100,000 per person per institution, and up to $250,000 for certain types of Individual Retirement Accounts.

Furthermore, for all its well-publicized stumbles, WaMu's capital ratios at the end of the fourth quarter were well above regulatory levels for classification as well- capitalized.

"Our deposit growth is up -- quarter over quarter, as well as year over year for the period," WaMu said in a statement. "We pride ourselves on our relationships with our customers.

"Like all financial institutions, WaMu recognizes that customer concerns may arise given the level of noise in the marketplace. As questions or concerns arise, we address them and believe it's important to reinforce that 1) WaMu has the liquidity and capital strength to manage through this period of marketplace volatility; and 2) that deposits with WaMu are insured to the limits established by the FDIC."

To judge from the voices, or in some cases information callers and e-mailers themselves provide, the questions tend to come from older readers, perhaps those who remember the Depression, or who heard stories from their parents or grandparents about an era when bank closings and lost deposits were far more common. Indeed, there may be something of a generational divide evident here; if younger consumers think about the issue at all, they're comfortable with the notion that while banks may run into trouble, their deposits won't.

"Anybody who was alive and cognizant in the 1980s should feel fairly confident with where we are," says William Isaac, managing director with the Vienna, Va., office of LECG, which provides consulting and analysis services. They should also feel confident that "the FDIC is not going to let the system come unglued."

Isaac has more than a little perspective on the subject of bank safety and security, and why deposits stay put or move when trouble is brewing. He was an FDIC board member for eight years, and from 1981 to 1985 -- one of banking's hairier eras -- was its chairman.

From the 1940s through the 1970s, "We had almost no bank failures," Isaac says, but that came to an end in the 1980s. Early in the decade, savings banks in the Northeast ran into trouble. "We did see funds start to flow out of those institutions," Isaac says. When one in particular got hit with "a good old-fashioned retail deposit run," regulators moved in over a weekend and found someone to take it over. "We really felt we needed to make a statement."

The next big problem was Continental Illinois, where billions of dollars, mainly in short-term "hot money" deposits, much of that from overseas, evaporated almost overnight. Again regulators stepped in with a short-term rescue to stabilize the bank, then found a long-term buyer. "Essentially we wiped out the shareholders," Isaac recalls, but depositors, insured and uninsured alike, had been given a guarantee by the FDIC early on that they'd be protected.

Interestingly, the FDIC had put a similar package in place for Seafirst Bank, which, like Continental Illinois, had run afoul of oil patch loans gone bad. Isaac says regulators told Seafirst executives not to call on it unless they really needed it because "once you call, we're in charge of your institution." As it turned out, Seafirst worked out an acquisition with the same institution -- Bank of America -- that later bought Continental Illinois.

A few years later, Bank of America itself ran into trouble (Third World loans were a major culprit). What saved BofA, Isaac says, was "a very solid franchise" in the retail sector. "Those retail depositors didn't panic. They stayed in."

(As a contrast, your columnist, about that time but many states away, covered a minirun that hit one branch of a bank about which there had been considerable speculation as to its health. What was striking was that the run hit, and then dissipated, in the space of hours. And this was in the precell phone and Internet days, technologies that would today spread word-of-mouth rumors at light speed.)

If depositors need further reassurance, they can look at regulators' intervention in putting together a rescue package for investment banker Bear Stearns. Whatever one's opinion of that deal -- and Isaac says he has some reservations about it -- "it's a very powerful statement of the lengths the government is willing to go to to keep the system from careening out of control."

While deposit runs can be short and dramatic, they can also be quiet and spread out over weeks. One difficulty in determining what's going on is that deposit data are often a poor indicator of underlying trends. Deposits can fluctuate by season. Banks that don't need as high a level of deposits to fund loans, because of reduced demand, or find a cheaper source of funding, may reduce the rates they offer and let deposit levels drop as CDs mature and customers look elsewhere for a higher yield.

But there can be movement, depending on the circumstances, among those depositing large amounts of money above the FDIC insurance levels, such as institutions. The investment analysis firm CreditSights, in a recent report, noted that "WaMu does have a large dollar (amount) of non-FDIC guaranteed shorter-term deposit funding (jumbo CDs, institutional CDs) and exposures to the brokered deposit markets which is a more confidence sensitive funding channel." Should loan losses persist, leading to further downgrades by credit-ratings agencies, some of those "noncore funding sources ... become less reliable."

At the same time, WaMu is "more dependent on FDIC-guaranteed deposits which historically are much more stable sources." WaMu has in its favor its extensive branch network and growth in checking accounts to bring in those deposits.

What it, the FDIC and the banking system also have in their favor is a track record of relative calmness on the part of American consumers in the face of bad news. Because of the track record of depositors being protected, Americans appear to have bought in to the idea that what's going on with bank stocks does not affect the safety and security of bank deposits.

The challenge for federal regulators will be making sure their services and intervention are not required, and maintaining the confidence of Americans that, whatever else is happening, both they and their deposits can get an undisturbed night's sleep.