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How Successful Will Bank Transfer Day Be?

Morgan Housel
November 3, 2011

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