More powers for banks may be on hold, but boost in savings gives some solace
The stock market's October fall may not do bankers any favors in the long run. The banking industry wants to see restrictions removed on the buying and selling of securities, underwriting activities that are pretty much in the securities industry's domain, thanks to a 1933 law.
Congress has placed a moratorium on enlarging bank powers until March, allowing for time to work out a compromise to amend the 54-year-old Glass-Steagall Act. This law placed a wall between the banking and securities industries to protect bank depositors.
A couple of weeks ago the comptroller of the currency and the chairman of the Federal Deposit Insurance Corporation (FDIC) testified before Congress to urge certain new investment powers to banks.
But given the 508-point decline on ``Black Monday,'' Oct. 19, and the subsequent volatility in the market, the banking industry may have a hard time convincing Congress that securities activities are still not too risky.
The market, although calmer, is still trying to find a bottom range, three weeks after the plunge. Pushed by a last-minute sell-off Friday when it lost more than 30 points in the final hour of trading, the Dow Jones industrial average ended the week at 1,959.05, down 34.48 points.
In the short term, the market's volatility has given some banks solace, as anxious investors shifted their funds into the traditionally safe haven the banks provide. Typically the banking industry does see an inflow of deposits during times of uncertainty, says Charles Peabody, a senior bank analyst at Drexel Burnham Lambert Inc.
``We saw this with the Continental Illinois Bank problems in 1984 and the Mexican debt crisis in 1982. I suspect the same thing is happening now,'' he says.
Banks throughout the United States have reported that deposits have increased in some accounts. Banks are advertising to attract customers; Chemical Bank, for example, is running an ad showing a bull with a tear in its eye and the phrase ``Maybe it's time to put your money in Chemical Bank.''
Bank customers are also turning to US Savings Bonds, which have the credit of the US government behind them. Security Pacific National Bank in Los Angeles reported a 50 percent climb in the sales of savings bonds for the week of Black Monday. Last Monday the Treasury Department increased the interest rate on Savings Bonds to 7.17 percent, from 5.84 percent.
There have been some modest increases in rates on NOW accounts and some savings accounts. ``Over the last two weeks we've seen anywhere from 2 percent to 7 percent increases in our four banks,'' says Carl Campbell, the president of the bank holding company Keystone Financial Inc., Harrisburg, Pa.
``I would attribute this growth to the security net of the FDIC and the flight by investors to quality and stability.''
Robert Steele, chairman of Dollar Dry Dock Bank in White Plains, N.Y., says his bank has seen substantially increased activity in six-month certificates of deposit. The bank is pursuing an aggressive program to keep those CD customers - and not just become a parking space for investors who are waiting for the market's return to stability.
``Before Black Monday we'd seen an increasing interest in bank CDs,'' Mr. Steele says. From Aug. 29 to Oct. 19, new money coming into the six-month CDs was $16.4 million, while from Oct. 19 to the 31st the amount was $21 million, he notes. The number of new accounts from Sept. 12 to Oct. 19 was 1,079; the number from Oct. 19 to the 31st was 2,033.
Chris Kotowski, a banking analyst at Oppenheimer & Co., says he would not expect a massive increase in bank deposits.
``One reason you won't see that much long-term change is that once money is in a brokerage firm, the managers can switch across funds to money markets, where they are reasonably safe,'' he explains. ``The fall certainly doesn't hurt the deposit business, but I wouldn't look for a long-term trend.''
Both Keystone and Dry Dock are taking steps to capitalize on the flight to safety. Keystone is emphasizing the stability and soundness of the banking system. In trying to hold depositors, Keystone has aimed at what Mr. Campbell calls a more steady group by offering a little bit of a premium on rates.
``Some people have gotten burned in the market, so maybe they are willing to settle for a little less return on their investment, but get the stability the banks provide,'' he explains.
``We're not aiming for the dyed-in-the-wool market player who will go in and out of the market, because people who invest regularly in the market will probably park their money in a money market fund,'' he adds. Keystone is running ads to get its message across.
Campbell says Keystone's rates for deposits are pretty competitive with the stock market, ``but we don't have the opportunity for capital appreciation - or depreciation!''
Dollar Dry Dock had two choices in its approach to retaining customers, Steele says. ``We could either appeal to those who were looking to park their money short-term, like in a money market fund, or the six-month CD,'' he explains. The bank was not interested in customers who were just looking to park their money temporarily.
``We decided we would aggressively market and seek money in the six-month CD. This strategy was designed to build a relationship with people who go into that account, because to get the rate we offer, they have to have a Super NOW account with us,'' he explains.
The account is the key, Steele says, because ``once people have a transaction account, they are more likely to use the bank.''
Dollar Dry Dock says in one newspaper ad that Japan's economic strength comes from people saving nearly 25 percent year after year. ``If you want to help yourself, and contribute to building America's economic strength, consider `socking away' a little more of your income. A good way to start is with the High Rate CD's at Dollar Dry Dock,'' Steele says in the ad.
Clearly the inflows will help the banks, Mr. Peabody of Drexel says. ``This is going to contribute to a healthy margin for banks, but much depends on what happens in the markets and to the interest rates. I don't think we're out of the woods yet'' with the stock market's volatility, he adds.
Just how much banks will benefit from the market's plunge is hard to determine now. ``It's too early to measure the inflow of deposits,'' Peabody says. ``Normally in the fourth quarter there's a seasonal inflow of corporate dollars, brought about for tax reasons. It's hard to separate that and what's brought about by the markets.''