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Increased Numbers of Americans Thriving Outside the US Banking System


GDO Report

ATLANTA - While still in the throws of the worst recession in history, more Americans either voluntarily or otherwise are living completely free of US banking system. 

Instead, they rely on alternate means of cashing checks and utilize pre-paid debit cards to help manage their finances. 

According to a new report from the Federal Deposit Insurance Corp. (FDIC) these Americans are more vulnerable to higher bank fees & interest rates while also being cut off from credit to buy a car, buy a home and obtain a college loan as well.

Released Wednesday, this particular study shows that 821,000 households either opted or were forced out of the banking system from 2009 to 2011 and that the so-called "unbanked" population grew to 8.2 percent of U.S. households.

American Banks Thriving In Recessed US Economy
Reprinted with Permission
July 6th, Edition
"The Eagle"
Bryan-College Station, Texas

WASHINGTON — Fewer U.S. banks are failing than at any time since the financial crisis erupted in 2008. The healthier banking industry is helping sustain an economy slowed by lackluster hiring, weak manufacturing and Europe’s debt crisis.

Banks have benefited from low interest rates, higher account fees and more mergers. The recovery from the financial crisis has helped, too. It means more people and businesses can take out and repay loans.

Banks remain generally cautious about lending. And their rebound has yet to drive a robust economic recovery from the recession that officially ended three years ago. But the banks’ gains have allowed them to make gradually more loans and keep the economy from slowing further. Bank loans rose at a 2.1 percent annual rate in the first three months of 2012 and at a 4.6 percent rate since then, according to the latest Federal Reserve data.

Signs of the industry’s improvement:

    • Banks are making more money. In the first three months of 2012, the industry’s earnings reached $35 billion, up from $29 billion in the first quarter of 2011. It was the best showing since 2007. At the depth of the recession in the fourth quarter of 2008, the industry lost $32 billion.

    • Fewer banks are considered at risk of failure. In January through March this year, the number of banks on the Federal Deposit Insurance Corp.’s confidential “problem” list fell for a fourth straight quarter. The list consists of banks considered at risk of failure. The list numbers 772 as of March 31 — about 9.5 percent of U.S. banks. At its peak in the first quarter of last year, the number was 888.

    • Bank failures are down. In 2009, 140 banks failed. In 2010, more banks failed (157) than in any year since the savings and loan crisis of the early 1990s. In 2011, 92 failed. This year, regulators closed 31 in the first half of the year. For the full year, they’re on pace to shut down around 60. That’s still more than normal. In a good economy, only about four or five banks close each year. But the pace shows sustained improvement.

    • Less fear of loan losses. The money banks must set aside for possible loan losses declined by nearly a third in the January-March quarter compared with a year earlier. Their loan portfolios have grown safer as more customers have repaid on time. FDIC figures show loan losses have fallen for seven straight quarters. And the proportion of loans with payments overdue by 90 days or more has dropped for eight straight quarters.

The main reason for the sharp drop in bank closings has been a stronger economy. Employers have added nearly 1.8 million jobs over the past year, which means more people and businesses have money to repay loans.

Also helping strengthen the banks:

• Record-low interest rates. They’ve enabled banks to pay almost nothing to depositors and on money borrowed from other banks or the government. They’re paying an average of 0.5 percent on money-market accounts and interest checking accounts. Yet they charge their own borrowers much higher rates on credit cards and other loans. They’re taking in an average of around 16 percent on credit cards, 5.7 percent on home equity loans, 3.8 percent on auto loans and 3.6 percent on 30-year fixed-rate mortgages.

• More bank mergers. Fifty-one bank mergers were announced in the first quarter, according to SNL Financial. That was up from 39 deals in the first quarter of 2011. Some weak banks have agreed to be bought by stronger institutions to avoid failing, says Robert Clark, a senior analyst at SNL Financial.

• Higher capital levels. Banks have boosted their capital, the cushions they hold against risk. They increased it by nearly 4 percent in the first quarter, according to FDIC data. That raised the industry’s average ratio of capital to assets to 9.2 percent, matching the record-high ratio of the second quarter of 2011.

The industry’s rebound began in 2009 with the biggest U.S. banks, thanks to taxpayer bailout aid. Small and midsize banks have taken longer to rebound. They were saddled by high-risk real estate loans used to develop malls, industrial sites and apartment buildings. Many of those loans weren’t repaid. As the economy has strengthened, fewer loans have soured, and many smaller banks have recovered.

Past-due rates on commercial real estate loans began to decline last year. And banks have boosted the number of commercial loans they’ve been able to sell to investors.

For example, net income for Regions Financial Corp., a midsize bank based in Alabama, jumped in the first quarter this year to $145 million, from $17 million a year earlier and a loss of $255 million in the first quarter of 2010. Regions issued more home and commercial loans, and its mortgage revenue jumped 35 percent.

Regions also got approval from the Fed to repay the $3.5 billion bailout money it received during the financial crisis. And the money it set aside for loan losses was the lowest in more than four years. More of its customers are paying on time.

At the same time, some small and mid-size banks remain vulnerable. That’s especially true in states hit hard by the real estate bust or by slumping state economies. California, Florida, Georgia and Illinois reported the highest number of bank failures in the past four years. They’re also among the states with the highest home foreclosure rates.

One reason is the fees banks have traditionally feasted on, such as overdraft fees on checking accounts, have been curbed by new regulations. Banks are now barred, for example, from automatically enrolling customers in a service that charged them up to $35 for overdrafts.

That change is cutting into revenue for community banks in particular. So are the costs of complying with some regulations imposed by the 2010 financial overhaul law.

Experts caution that government examiners have let some smaller banks make their balance sheets appear stronger than they are.

“There’s a lot of stuff hidden under the hood,” such as soured loans that haven’t been adequately written down, warns Daniel Alpert, managing partner at the investment bank Westwood Capital Partners. Those risks could surface if the economy suffers another shock, Alpert says.

U.S. bank failures consist of both federally chartered and smaller, state-chartered banks. The federal government insures both and guarantees deposits of up to $250,000 per account.

Overhanging the banks’ future is the health of the U.S. economy. That, in turn, hinges on whether employers step up hiring and sectors like manufacturing and construction improve. Europe’s debt crisis poses a big threat, too.

U.S. banks have reduced their exposure to Europe. But a collapse of the 17-country euro alliance would likely weaken the U.S. banking system. Export markets for U.S. manufacturers could shrink. The U.S. economy would slow. Businesses and consumers whose loans drive banks’ revenue would find it harder to repay their loans. And banks would be squeezed.

“Banks can only be as strong or weak as the economy,” says Mark Williams, a finance professor at Boston University and a former bank examiner for the Federal Reserve.

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Not included in this report are reasons why many Americans have been forced to live outside the banking system.  Often times banks such as Bank of America allegedly use unethical practices to manipulate their customers' transaction histories to make it appear as though their customers made charges at times when available funds were insufficient.  According to former Bank of America customers, the bank allegedly uses tactics such as these to generate groups of costly erroneous penalties and fees they charged to their customers' accounts.  Banks allegedly do so even when the accounts in question automatically reject charges that are greater than the amount of funds available. 

According to these former Bank of America customers, these erroneous penalties and fees can exceed $500 in any given month and the bank freezes their customers' funds while they claim to be looking into these matters.  Sometimes the fees are reversed, sometimes they're not and other times the funds are only partially refunded after long periods of time.  Sometimes, these unexpected erroneous penalties and fees often times cause regularly occurring charges to bounce making damages become exponentially worse.

In this economy, household finances can run very tight.  It's often difficult for many account holders to undergo these unexpected charges and worse, have their business's or family's funds frozen indefinitely.  This alleged behavior on behalf of banks like Bank of America is forcing their customers to close their accounts and to live outside the banking system as reflected by Wednesday's report.  And what's worse is there's no effective oversight or remedy.

It may be inconvenient for individuals, families or even businesses to live outside the banking system - but a savings of $500 in erroneous fees combined with the many savings from avoiding all the costly penalties and regular fees banks love to charge - living outside the banking system can often be extremely beneficial.

More Statistics From Wednesday's FDIC Report:
Wednesday's report also indicated that roughly 17 million adults are living without checking or saving accounts.  More than 50 million adults do have a bank account, but borrow money through non-bank sources, the FDIC said.  Over the last year, this portion of the US population has grown from 18 to 20 percent of households nationwide.

The report also indicates that extremely high unemployment and underemployment has placed millions of Americans in financial positions where if they did have enough funds to keep open bank accounts - they would not be able to afforD to "absorb" regularly occurring overdraft charges or minimum-balance fees.

Banks' recent inability to generate their desired profit levels that Wells Fargo, Capital One and SunTrust have alerted customers to pending fee hikes on checking accounts or have raised overdraft charges.  These banks are not losing money, they're in-fact generating enormous profits.  However, they've decided that they're not making as much as they wish, so they're increasing overdraft charges along with checking account fees.

Banks also add that they find it difficult to make money serving lower-income communities because the cost of managing their accounts outweighs the return.

Further Comments From Bank Regulators Regarding Wednesday's Report

“There has to be a recognition that there are costs to providing accounts and those costs have to be covered,” said Nessa Feddis, vice president and general counsel at the American Bankers Association. She estimated that it costs banks up to $300 a year to maintain a checking account because of expenses such as processing transactions.

National Community Reinvestment Coalition chief executive John Taylor argued that banks could make up some of that cost by the sheer volume of new accounts.

Feddis disagreed. “You can’t take a losing account and make it up in bulk,” she said. “You’re not going to spend money to lose money.”

Without access to traditional banks, Taylor said, Americans are susceptible to abusive practices at non-bank institutions and are likely to remain trapped in a vicious cycle of financial strain.

With the above being stated for the record, it's important to take not of the record profits posted by US banks over the last several years.  Many bank executives are enjoying record bonuses for their role in all the success and profitability they all helped to their respective institutions to earn.

Many readers are looking forward to the reports that indicate that all the US stimulus money these banks received has been repaid in full.

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