Ordinary Americans lack the power to hurt the big banks

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By Martha C. White
Sunday, January 10, 2010

Arianna Huffington is mad as hell and not going to take it anymore -- or doesn't think you should. The woman behind the Huffington Post recently exhorted Americans to yank their money out of big banks and open accounts at community banks instead. She called out the Big Four -- Bank of America, Citi, J.P. Morgan Chase and Wells Fargo -- by name for their "slap in the face to taxpayers." The crusade includes a link to a new Web site called Move Your Money (http://www.moveyourmoney.info), which includes clips from "It's a Wonderful Life" and a tool for finding a new bank courtesy of Institutional Risk Analytics.

This is a great example of populist indignation made practical (HuffPo says it does its banking with a smaller bank that specializes in start-ups). It's also a great example of why populist indignation shouldn't drive policy. We get the outrage: The banks did something bad, so let's spank the banks. But let's also do the math. Would it even be possible for the roughly 72 million American families with checking or savings accounts to appreciably diminish banks' holdings just by closing their accounts?

Banks make their money in a lot of ways, says Bert Ely, owner of the bank consulting company Ely & Co. One such way is by collecting fees. For instance, banks are projected to collect $38.5 billion in overdraft fees this year, and about 90 percent of those fees come from only 10 percent of the customer base. While the new opt-in requirement for overdraft protection will probably lower this number in coming years, it's safe to assume that banks will come up with other ways to extract their pound of flesh. A recent Bankrate study showed that many fees, including those for account maintenance and out-of-network ATM use, rose last year.

Banks also make money from merchant fees paid by retailers every time someone swipes a credit or debit card. And a program just announced by the Federal Reserve, aimed at curbing inflation, will even pay banks interest to park their excess reserves in the equivalent of CDs at the central bank. There's also investment banking, consulting fees and a host of other income streams, both in the United States and abroad.

Then there are individual accounts. Such deposits actually make up a relatively tiny portion of bank holdings. The largest U.S. bank, Bank of America, had roughly $1.5 trillion in assets and $1.3 trillion in liabilities for the third quarter of 2009, according to the Federal Deposit Insurance Corp. While total deposits (which, by the way, are logged as liabilities rather than assets on bank balance sheets) were around a trillion dollars, deposits by individuals, corporations and partnerships in what are dubbed "transaction accounts" in industry-speak totaled only around $83 billion.

For the sake of argument, though, let's assume that a drop of a few percentage points' worth of deposited funds would make the Big Four take action. What would it take to get there?

First, people have to switch. As Felix Salmon pointed out in his blog post about Huffington's crusade, changing banks is a real pain in the neck. In a 2007 Jupiter Research study, 22 percent of the bank customers polled admitted that they were staying with their current bank solely because switching was too much of a hassle. As the use of direct deposit and online bill paying has escalated, it's likely that number is even higher today.

To make a change, an unfathomably high number of Big Four bank customers would have to subject themselves to this hassle. Collectively, the Big Four (plus Wachovia, which is being incorporated by Wells Fargo) have roughly $209 billion in transaction deposits. Let's say shaving 5 percent off that tally would accomplish Huffington's goals. (Let's also leave aside the fact that there's no guarantee such action would make banks friendlier. Citi's been bleeding cash for months, and it's become notorious for 29.99 percent interest rates on its credit cards.)

Here's one problem: The small banks rely on the big ones, as Ely points out. In fact, for foreign-currency exchanges and complex loan offerings, among other transactions, small banks regularly turn to their brawnier brethren. The small and medium-size institutions that Huffington lionizes depend on the industry's behemoths for "correspondent banking," as it's known in the industry. That would cushion any blow the big banks might feel.

But Move Your Money's biggest problem is that the average American bank account has only $4,000 in it, according to the American Bankers Association. To achieve that 5 percent reduction, you'd need to have roughly 2.6 million Big Four customers close their accounts.

Of course, there are wealthy Americans with much more than four grand to their name; unfortunately, they're not stashing that cash in checking accounts. A 2007 article in the Wall Street Journal, drawing on research conducted by the firm Prince & Associates, found the vast majority of those with a net worth of more than $1 million don't even bother with mutual funds, let alone checking accounts. Daddy Warbucks investors sink their money into start-ups and hedge funds for better returns. Maybe they've got a yacht payment or two in their checking accounts, but that's not where the real money is, so getting a handful on the small-bank bandwagon isn't going to have the kind of outsize effect one might hope for.

Huffington says the Big Four "are not too big to feel the impact of hundreds of thousands of people taking action to change a broken financial and political system." For her campaign to really have an impact, though, even hundreds of thousands wouldn't be enough.

Martha C. White is a freelance writer in New York.


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