What Else is New? Banks making it impossible to live paycheck-to-paycheck

Citibank needs seven days?

By —— Bio and Archives--March 2, 2010

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Late last week, a slight furor arose when it became public knowledge that Citibank sent the following notice to customers:

“Effective April 1, 2010, we reserve the right to require seven (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change.”

In my opinion, this was not just a notice about Citibank or Citigroup.  It was a notice to people that all banks are undercapitalized and all have the right to take up to seven (7) days to clear a check or to give you all the money in your checking account if you demand it.

Further, Citi came out with a second statement trying to explain away the negative reaction its first announcement received.  More about that below.  First, there are some things all people need to know about how banks function.

Ironically, it was just four days ago I completed a chapter in my new novel about Federal Reserve System reserve requirements on deposits.

Following is some text from Chapter 31.  The name of the book is immaterial – it won’t be out for at least six months.  This is taken from the middle of the chapter and a banking expert is being questioned by a lawyer, before a Grand Jury:

“What do bankers call ‘checking accounts,’ Mrs. Plotnikov?”

“Demand deposit accounts, or, DDAs” she replied, her tone informational.

“Why is the word ‘demand’ used?”

Meredith cleared her throat before speaking.  “Because bankers promise depositors they can have the money they deposit with them when they demand it.  Banks also have ‘time’ deposits, or TDAs.  A TDA refers to money a person promises to leave in the bank for a specified time period—like a certificate of deposit.  Demand deposits – more commonly known as checking accounts – represent client access to cash upon demand.”

“Is that true?”  Lew posed his question as if he were merely curious, smiling at his witness.  “When people walk into their banks and demand access to their money, do they get it?”

“Generally speaking, it is.  There are, however, circumstances where it is not true.”  She neither smiled nor frowned.

“Under what circumstances would it not be true?”

“Bankers know that under normal circumstances they need only keep a small percentage of deposits available as vault cash to handle customer needs – the Federal Reserve requires most large banks to keep ten percent available on deposit with the Fed as reserve cash,” she replied.  She took a breath and continued.

“Banks lose money on deposit accounts by providing clearing services for people who write checks.  They lose money on deposit accounts when they pay interest on funds deposited.  Banks make money by making loans.  At least that’s how commercial banks made money prior to Congress passing the Gramm, Leach, Bliley Act of 1999.”

“Can you explain the Gramm-Leach-Bliley Act? Why did banks begin making money differently after it was passed?”  Lew asked her, brows furrowed and his face serious.

“Gramm-Leach-Bliley enabled commercial and investment banks to consolidate. Citigroup, one of the ‘Big 9’ currently in financial hot water, merged with Travelers Group Insurance in 1998. They combined banking and insurance underwriting services. The Glass Steagall Act had for many years prevented the combining of insurance and securities companies with commercial banks. Gramm-Leach-Bliley allowed commercial banks to speculate, or said another way, to invest depositor dollars rather than just make loans.  That, too, was prevented by Glass Steagall.  So, rather than having to make loans to earn a profit, banks could invest in other money-making ventures.”

“Like mortgage-based derivatives?”  His tone was only slightly ironic.

“Yes,” she said.  “Like mortgage-based derivatives. It’s important to remember that when banks make loans in a community, it stimulates the local economy.  When depositor dollars are invested in derivatives or any other financial product, it reduces funds available for loans in the local business community.”

“What do the loan and investment functions at banks have to do with deposits?”

“Deposits are the banks’ primary source of funding.  As a result, depositors’ funds are not kept in a vault at the bank, as many people assume.  The funds have been loaned out or invested.  Usually, when bank customers want or need to take large amounts of money out of bank accounts, or want to close an account,  customers have to give the bank notice.  If you remove more than a few thousand dollars, you’ll probably be given a Cashier’s Check, not cash… even if you ask for it.”

“So when too many customers ask for large amounts of money at one time, what does a bank do?”

She smiled.  “The bank usually goes to the Federal Reserve System for cash.”

“Is the Federal Reserve System a bank?” he asked, curiously.

“No.  Not really.  It serves as a bank wholesaler.”

“Though I’m very tempted to ask you why banks need a middleman to give them money, Mrs. Plotnikov… let me get back to my questions about demand deposits.  Based on what you’ve just told us, when bankers tell customers they can demand cash on deposits whenever they want, bankers are lying.  Is that correct?”

“It is.”  Meredith nodded her head to emphasize her response.

“And if too many people demand their money at the same time, it’s called a ‘run on the bank,’ isn’t that true?”

“It is.”

“What causes a ‘run on a bank’?”

“Bad loans and bad investments reduce income to the bank.  When a bank can’t make new loans because of reduced capital, good borrowers begin looking for another bank.  When a bank’s deposits are tied up in bad loans and bad investments, they lose depositors who have need of credit.  They can’t demand – or, as bankers say, call – bad loans for payment, because if the borrower could pay, it wouldn’t be a bad loan.  They can’t sell bad investments while the market’s down.  They become undercapitalized.

“Bank auditors from the Comptroller of the Currency, or state banking auditors – or, sometimes FDIC auditors – catch the problem.  When too many depositors try to take their money from a bank, the FDIC – which says it insures deposits – takes the bank over to protect its interests.”

“What is the status of the FDIC today?”

“Let me quote the Chairman of the FDIC in a Bloomberg article last March:  He said the FDIC might go belly-up because of numerous expected bank failures.  He said it could happen in 2009.  Unless I’m mistaken, that’s this year.”

“You’re right.  It is this year,” Lew responded quietly.  “If the FDIC goes ‘belly-up,’ as you call it, will people still get their FDIC insured bank deposits?”

“Probably, but maybe not.  I’m sorry I can’t be more definite than that but there are different scenarios for differing situations.  The FDIC could delay payments.  If a person has a $25,000 deposit, the FDIC can pay $1,000 a month for twenty-five months.  They may guarantee the deposit, but they do not guarantee instant payment.  So far, they’ve been able to pay lump sum amounts.  During the savings and loan crisis, the Federal Savings and Loan Insurance Corporation (FSLIC) paid $900 a month to depositors.  The same thing could happen at the FDIC.”

End of text from Chapter 31.

The point is, a lot of people were upset at Citibank’s national announcement about being required by law to give seven days advance notice that the bank may not permit withdrawals from accounts.  By anyone.  Including the account holder.

After everyone’s feathers got ruffled, Citibank decided it should explain:

“When Citibank moved to unlimited FDIC coverage in 2009, we had to reclassify many checking accounts to allow for immediate withdrawals in order to ensure all customers qualified for the additional coverage. When we moved back to standard FDIC coverage with most major banks in 2010, Citibank decided to reclassify those accounts back to make them eligible again for promotional incentives. To do so, Federal Reserve Reg D requires these accounts, called NOW accounts, to reserve the right to require a 7-day notice of withdrawal…”

That is not what Citibank said in its original statement.  The second statement makes it sound like the Federal Reserve’s Regulation D is the villain and the seven day requirement involves only NOW accounts. 

But the initial Citibank announcement said “We reserve the right to require seven (7) days advance notice before permitting a withdrawal from all checking, savings and money market accounts.”  Checking and savings accounts may or may not be NOW accounts.  And, Regulation D regulates the cash reserves banks must keep on deposit at the Federal Reserve.

Thus, their explanation doesn’t make sense.

The Citibank explanation makes it sound like they so badly want people to have access to bank promotional incentives that they had to change the status of depositor accounts because customers would suffer a fate worse than death if they didn’t have access to bank “promotional incentives.”

I hate to tell them this, but most people will be far more upset because the bank has warned them that when they write a check, Citibank may wait seven (7) days to pay the check.  That includes checks from you to you, by the way – checks made out to “Cash.”  I doubt the loss of access to “promotional incentives” will upset people nearly as much as not having immediate access to their money.

What the Citibank announcement amounts to is a news flash to people who aren’t abreast of what’s happening in banking.  It’s almost a full-time job to keep up with the changes!

Since many banks are under-capitalized, it’s just possible they may not have the cash available to pay the amount of your check to your utility company when the utility company deposits it.  If you pay your bills online, banks tell you they can electronically get payment to the business you are paying within three days.  Non-electronic payments (checks written to individuals or companies that are not set up to receive electronic online payments so your online bank sends checks by snail mail) take ten days.

Based on the Citibank announcement, you need to add seven days to those time frames to avoid late fees.  Your company may get the check, online or in the mail, but the bank may not clear your payment for seven days.  Who should get charged a late fee?  You?  Or, the bank that won’t clear your check for seven days?  By making their announcement, Citibank just told its customers they are the ones who will pay late fees.  They have warned their customers that it may take seven days for payment to be made… to clear your payments to creditors. 

This action by Citibank also suggests that the Federal Reserve may not have sufficient funds to immediately provide “vault cash” held by the Fed for every bank member as “reserve requirements.” That is where Regulation D gets involved.  The bank may ask for its vault cash held on deposit by the Fed, but does the Fed have the money to respond?  Maybe the Fed is concerned about its ability to fulfill the request.  There could be a lot of reasons and something is afoot, for sure.

As you pay your bills, keep that in mind.  If you wait until the last minute to write a check, online or otherwise, your bank may not clear the amount of your payment for up to seven days.  This doesn’t just impact Citibank customers, in other words.  If it’s true for them, it’s true for all banks.

Congress passes legislation to stop the outrageous bank fees being charged.  This is the banking industry’s response?  They are making it impossible to live paycheck-to-paycheck.

They may be making it impossible to pay your bills on time.

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Marilyn Barnewall -- Bio and Archives | Comments

Marilyn Barnewall received her graduate degree in Banking from the University of Colorado Graduate School of Business in 1978. She created the first wealth creation (credit-driven) private bank in America in the 1970s. Prior to her 21-year banking career, she was a newspaper reporter, advertising copywriter, public relations director, magazine editor, assistant to the publisher, singer, dog trainer, and an insurance salesperson and manager.

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