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Baylake Bank, ABA Provide Industry Perspectives on Economic Fluctuations & Deposit Stability

March 20, 2008
The purchase of Bear Stearns has focused a lot of attention on the financial services industry and especially on banks. This has raised some confusion, as institutions that perform many different types of services are called “banks.” The American Bankers Association (ABA) pointed out some key differences:

Commercial banks, which many local banking institutions are, take deposits for checking and savings accounts from consumers and businesses. These deposits are insured by the Federal Deposit Insurance Corporation for up to $100,000 per account and up to $250,000 for retirement accounts. To get this FDIC protection, commercial banks must follow a multitude of regulations based on a standard of safety and soundness. These banks lend this money to consumers and companies for autos, homes, business equipment, and so on.

Investment banks, like Bear Stearns, operate differently. The primary purpose of these firms is to facilitate the sale of stocks and bonds, and they cannot accept federally-insured deposits. Instead, these Wall Street firms operate as advisers and agents for companies that want to raise capital, often by issuing more stock or other securities.

According to the ABA, since the creation of the FDIC in 1933, no depositor has lost a single penny that was insured in a bank failure: “And that goes for bank failures, fires, floods, you name it. The banking system works.”

FDIC Insurance Protects Deposit Accounts

The FDIC (Federal Deposit Insurance Corporation) is an independent agency of the United States government. The FDIC protects consumers against the loss of deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government.

All FDIC-insured banks must meet high standards for financial strength and stability. The FDIC, with other federal and state regulatory agencies, regularly reviews the operations of insured banks to ensure these standards are met.

The FDIC insures all deposits at insured banks, including checking, NOW and savings accounts, money market deposit accounts, and certificates of deposit (CDs), up to the insurance limit. The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities.

The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank. If one individual has more than this amount at one insured institution, it can still be fully insured if the accounts meet certain requirements, and through proper account titling and management, since the FDIC provides separate insurance coverage for deposit accounts held in different categories of ownership.

“FDIC insurance has always been an important factor for depositors to consider in their financial management. When economic conditions get bumpy, people just pay more attention to it,” said Christie Felhofer, Baylake Bank Retail Compliance Specialist. “We can easily verify exact FDIC insurance for individual customers, and work with anyone who may be concerned about making sure their deposits are effectively covered.”

In addition, through a service called CDARS some banks, including Baylake Bank, can offer up to five times the standard $100,000 level of FDIC coverage found at most banks, for a total of up to $50 million. “It’s extremely convenient for our customers,” said Vice President of Cash Management Denee Mott. “CDARS customers work with one bank, sign one agreement, and receive one account statement regardless of the number of certificates they have invested. CDARS has been a popular choice for municipalities, as well as a secure individual or business investment.”

To participate in the CDARS (Certificate of Deposit Account Registry Service) program, a bank must belong to a special network called Promontory Network. When a customer or municipality places a large deposit with a network member, the bank arranges for the placement of funds into certificates issued by other network banks—in increments of less than $100,000 to ensure that both the interest and principal are eligible for full protection.

Currently, more than 1700 institutions, including Bayake Bank, are members of the Promontory Network. Baylake Bank was recognized in 2007 with a Leader Award by Promontory for gross volume of deposits utilizing the Certificate of Deposit Account Registry Service.

Additional Banking Industry Facts:

Banks are highly capitalized and prepared for economic fluctuations

• Banks are well-positioned to handle economic downturns, and if necessary, take steps to put losses behind them.

• Banking’s capital – which serves as a buffer against any losses – is at historic highs. At year-end 2007, the industry held $1.35 trillion in capital plus $102 billion in reserves for a total buffer of $1.45 trillion.

• Banks have experienced strong growth in loan performance over the past six years, supporting a growing economy.

Bank risk management is at an all-time high

• Banks have increasingly put enterprise-wide risk management processes in place, increased the use of sophisticated risk-management systems and tools, and implemented strong schemes of checks and balances.

• Advances in collecting data and benchmarking performance, identifying key risk indicators, and controlling operational risks have all contributed to sound banking.

Regulation and supervision of bank risk has also improved

• Federal laws adopted since 1991 have significantly strengthened bank regulation.

• The regulators have also fortified examination practices. They adopted a supervision-by-risk approach to get bankers and examiners to focus on the quality of risk management systems and have continued to advance expectations for risk management.

• Auditing and internal control standards have also toughened.

Banks have resources to meet the needs of their communities

• Banks play an integral role in local economies across the nation. With $8.4 trillion in deposits, banks have plenty of resources to meet the lending needs in their communities. Banks put these monies to work in their communities by providing loans and other financial services.

• Many people are turning to their local bank to help refinance existing mortgages or consolidate other forms of debt. Banks made $200 billion in new loans in the fourth quarter of 2007, $80 billion of which were loans secured by real estate, demonstrating that the local bank continues to be the best source of business and personal loans.

• Our diversified industry of more than 8,500 banks with 97,000 locations nationwide stands ready to serve customers. The vast majority of banks have been in existence for decades and plan to serve their customers for many, many more.

About Baylake Bank
Baylake Bank employs over 320 individuals throughout northeastern and central Wisconsin and serves its communities from 28 financial centers in Brown, Door, Green Lake, Kewaunee, Manitowoc, Outagamie, Waupaca, and Waushara counties, and from its website at www.baylake.com. For more information call (920) 743-5551 or 1-800-267-3610.

About the ABA
The American Bankers Association brings together banks of all sizes and charters into one association. ABA works to enhance the competitiveness of the nation's banking industry and strengthen America’s economy and communities. Its members represent over 95 percent of the industry’s $12.7 trillion in assets and employ over 2 million men and women.