How Successful Will Bank Transfer Day Be?

This Saturday is Bank Transfer Day, when a group of unknown thousands plan on transferring their money from for-profit banks to local credit unions in one quick push. As the group's Facebook page notes:

Together we can ensure that these banking institutions will always remember the 5th of November. If we shift our funds from the for-profit banking institutions in favor of not-for-profit credit unions before this date, we will send a clear message that conscious consumers won't support companies with unethical business practices. It's time to invest in local community growth!

I like the spirit of this. One of the surprising things in the three years since the bank bailouts is that credit unions didn't clean up, as many expected they would. Total loans owned by credit unions have actually declined 4% since 2008. Outrage at Wall Street banks didn't seem to deter customers -- until now. If the goal is to right the economy so it can create jobs, I'm not sure an organized bank run is the answer. But in terms of the banking services most people need, more would probably be better off at local credit unions.

Yet the movement isn't just about ditching banks to avoid fees. Part of it seems to be about teaching them a lesson -- if you mistreat consumers, they will vote with their feet and take their money elsewhere.

Ironically, banks might be just fine with that. They may even want you to take your money elsewhere.

Ever since the financial crisis, and particularly over the past six months, banks have been inundated with deposits. Since 2010, checkable deposits at U.S. banks have surged 45%, and total deposits including savings accounts are now at an all-time high of nearly $10 trillion.

That deposit growth would normally be welcomed. Banks could lend the money out and earn a nice interest spread, increasing profits.

Today, it's a little different. The deposit surge has come at the same time loan demand has dropped (at least from creditworthy borrowers), and the net interest margin -- the difference between what banks pay out in interest costs and what they earn in interest charged on loans -- has shrunk. That's been accentuated over the past few months as the Federal Reserve lowered long-term interest rates in a campaign called Operation Twist. Banks have a growing flood of cash from deposits, but fewer options to profitably invest that cash.

Take Wells Fargo (NYSE: WFC  ) : The bank's net interest margin fell in the most recent quarter. Behind the drop, the bank said on a conference call:

We ... generated exceptionally strong deposit growth with balances up $41.8 billion, driven by a flight to quality and new account growth. This strong deposit growth was the primary driver behind the decline in the [net interest margin] this quarter, accounting for about 70% of the change from the second quarter.

As The New York Times explained, "Of the $41.8 billion of deposits that Wells Fargo collected in the third quarter, only about $8.2 billion was earmarked to finance new loans." In other words, deposits increased far faster than the bank could lend them out. Since it costs banks money to hold deposits -- even if they don't pay you interest, there are FDIC fees and other overhead costs -- the inability to make new loans chews into profits.

Wells isn't alone. This summer, Bank of New York Mellon (NYSE: BK  ) actually started charging institutional clients fees on large deposit balances to discourage further growth. Deposits were flooding in at levels it simply couldn't keep up with as clients sought "a safe-haven in light of the global interest rate and credit environment," it said. JPMorgan Chase (NYSE: JPM  ) and US Bancorp (NYSE: USB  ) are doing something similar, charging small-business customers a portion of FDIC fees to offset the cost of holding deposits. In a letter to shareholders, JPMorgan CEO Jamie Dimon once described the large flood of money coming in during the financial crisis by stating, "We barely knew what to do with it."

Consider another quote from the Times:

Even some community banks, vaunted for their little-guy orientation, no longer seem to mind if you take your money somewhere else.

"We just don't need it anymore," said Don Sturm, the owner of American National Bank and Premier Bank, community lenders with 43 branches in Colorado and three other states. "If you had more money than you knew what to do with, would you want more?"

At Hyde Park Savings Bank, management is actively shooing small customers away, dropping interest rates on CDs in an attempt to "encourage less-profitable customers to move on," according to the Times. "It's very hard for us to take deposits and make any meaningful spread," the bank's CEO said.

Even before interest rates plunged, more than half of all checking accounts were unprofitable, according to a report by Celent. Add in new regulations that restrict banks' ability to earn interchange fees and clamp down on overdraft charges, and banks may indeed be happy to see some retail customers go, especially now that Bank of America (NYSE: BAC  ) and others have decided to drop plans to charge monthly fees for debit card usage.

Now, combine all of this with the Bank Transfer Day's mission, and an interesting possibility emerges: Everyone might end up better off. Consumers might switch to credit unions where they get better service and lower fees, and for-profit banks might stem some of the rampant deposit growth and unprofitable customers that have been crimping profits. If only more protests could work this well.

Fool contributor Morgan Housel owns B of A preferred. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of JPMorgan Chase, Wells Fargo, and Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 03, 2011, at 5:33 PM, xetn wrote:

    Since all the major banks are sitting on huge reserves at the Fed, a run of the sort described in this report would probably do no real damage. But hey, they always have the FDIC to assist. After all, that was the pretense for creating another moral hazard in the 1930s. "Insuring deposits kept people from taking the money and running. (No more fear of the lack of cash).

  • Report this Comment On November 03, 2011, at 5:36 PM, DJDynamicNC wrote:

    I will be participating in this. I'm happy to hear it may work out well for all involved.

    Well, mostly happy. Wouldn't mind a little pain on Wall Street.

  • Report this Comment On November 03, 2011, at 7:23 PM, n8larson wrote:

    This struck me as funny, because I'm planning to OPEN a checking account with my high-school-age son at Chase on Saturday. I love Credit Unions and would rather bank with one in general, but Chase treats me very well because my rentals' mortgages are there. The CUs won't refinance them for me because the home price swoon pushed me below their debt/equity minimums. Plus, we still use cash for many things--big-bank convenience wins for us, because we don't have to pay the fees they charge checking-only customers. I feel so 1%-ish all of a sudden (but I think I'm at about 12%).

  • Report this Comment On November 03, 2011, at 10:44 PM, CaptainWidget wrote:

    No one acts out of retribution, they act out of rational self interest. Why would people pull money out of big wall st banks and put them into credit unions?

    The government has already assured the big banks that, no matter what they do, they can't fail. So as an investor, it makes more sense to put my money with them, hoping they use it in as risky (but high yield) of a manner as possible. It doesn't matter if they lose my money, the government will pay me back.

    Contrast that with a local credit union that is not too big to fail, and if their books suck, they will (right along with my non-FDIC cash).

    Low interest rates and increased burdens from regulation making it unprofitable for banks to take deposits?? Jeez...I wonder who has the power to fix this problem........who in the world could raise interest rates and cut down regulatory burdens with the stroke of a pen......................

  • Report this Comment On November 04, 2011, at 8:15 AM, dbtheonly wrote:

    xetn,

    The FDIC is a moral hazard?

    Sigh.

    It protects Depositors, who would otherwise lose money when a bank fails.

    Did you never talk to your Parents or Grandparents about the Depression?

  • Report this Comment On November 04, 2011, at 8:18 AM, dbtheonly wrote:

    DJ,

    Bank of America's Credit Card Fraud department protected me when I didn't know I need protection. So like an honest Politician, I'll stay bought.

    Sorry

  • Report this Comment On November 04, 2011, at 9:55 AM, GeoffersonSpin wrote:

    I recently made the switch from Chase to a local credit union. I didn't hate Chase, they actually treated me fairly well. But now, my local credit union gives me 3.25% interest on my checking account, they automatically refund ATM fees at the end of each month, it's totally free, they are local and active in the community/schools, and my account is still insured just the same as any FDIC account. The only thing Chase had was that my account was free, and that probably won't last.

  • Report this Comment On November 04, 2011, at 10:46 AM, MaxTheTerrible wrote:

    So a group of disgruntled (most likely unprofitable) customers leaves for credit unions where they become happy. Banks improve their bottom line. Don't you just love happy endings?!

  • Report this Comment On November 04, 2011, at 1:30 PM, cattywampus wrote:

    Interesting take on the situation. I do like the way you think. Moving money to the smaller institutions will put it in the hands of loan officers who are more in touch with their local communities.

    Score one for small business investment. Fortune favors the bold.

  • Report this Comment On November 04, 2011, at 2:54 PM, klaybourn wrote:

    the credit unions have somthing simillar to the FIDC. Its called the NUCA

  • Report this Comment On November 04, 2011, at 6:07 PM, randallwaechter wrote:

    Banks are actively trying to get rid of money? This has officially blown my mind.

  • Report this Comment On November 04, 2011, at 6:50 PM, SafetyPin62 wrote:

    Hi

    I am publicising your campaign in Britain on Twitter and Facebook

    http://fran-haywood.blogspot.com (14)

    Fran

  • Report this Comment On November 06, 2011, at 6:31 PM, hank321 wrote:

    Currently have a credit union account, a national chain bank account, and a brokerage-associated bank account; and keep a handful of small CDs with each. These organizations all have their purposes. I routinely transfer assets around these nearly every month,...for my reasons,...not for any delusional, vacuous, anti-bank protest.

    banks per se did not cause our economic problems. Yes, there were some bad bankers who did idiotic things,...just like there are some incompetent teachers and policemen and doctors, amd mechanics and lawyers and politicians, etc....

    But I blame Larry Sommers, Robert Rubin, and Alan Greenspan for their short-sightedness in 1998, when they elected to NOT regulate derivative markets, more than I blame any bond traders on Wall Street.

    And beyond them, I blame the local crooked mortgage sales agents who loaned money to people who could not service the debt (like, Countrywide). And senators like Chris Dodd, who shielded Fanny and Freddy from needing to practice sensible risk management practices.

  • Report this Comment On November 24, 2011, at 12:07 PM, thidmark wrote:

    I'm not at all surprised there hasn't been a run on banks.

    If you've got direct deposit through your employer and ACH transfers set up at a bunch of places, it is a HUGE pain in the arse to up and change financial institutions. I'd do it if the savings are there, but not just to teach banks a moral lesson.

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