Tuesday, September 30, 2008

Small Bank Failures and Rural Banks

As we wait for Congress, it is necessary to consider the impact of perhaps hundreds of bank failures in the coming months . . . traditionally, larger institutions have been fully covered by FDIC, using techniques that allow other institutions to assume all deposits, keeping depositors whole. Small bank failures in recent years have followed a different pattern . . . uninsured deposits are often lost. The impact on the wealth of a rural area can be tremendous. The recent exit of Kansas Bankers Surety from the private deposit insurance business lends validity to this alarming trend.

Most disconcerting is that the average depositor has little information about ways to maximize FDIC coverage in a particular bank, AND this same average depositor has virtually no way of learning about the safety and soundness of a bank. This lack of education and information is troublesome, as it places depositors in small banks at a keen disadvantage to those whose deposits are in larger banks. This issue should be addressed in the current bailout legislation. In addition to raising deposit insurance levels (250k feels like a good start), steps should be taken to level the playing field of FDIC actions so that depositors at ALL sizes of banks are treated equally. Failure to do so may place an undue burden on those areas served by rural community banks.

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