US deposit insurance extended to bolster confidence in banks

The US Federal Deposit Insurance Corp. expanded deposit coverage as Sovereign Bancorp Inc. became at least the fourth major lender since July to suffer sudden withdrawals amid waning confidence in the banking system.

The FDIC said today it will fully protect through 2009 non- interest bearing accounts that process payments for payrolls and are used by businesses. Sovereign, which yesterday agreed to be bought by Spain's Banco Santander SA, said customers pulled $US4.2 billion, or almost 9% of deposits, in recent weeks as the government debated its $US700 billion rescue plan.

The new FDIC measures, aimed primarily at reassuring small- business owners, may end ``scaremongering'' that drove customers to pull deposits, said James Barth, former chief economist at the Office of Thrift Supervision and professor of finance at Auburn University in Alabama. ``It's a sign that you don't have to worry. The FDIC stands behind your deposits.''

US regulators have shuttered 15 banks this year, the most since 1993. Seattle-based Washington Mutual Inc. was the largest US bank to fail when regulators seized it last month after depositors withdrew $US16.7 billion in nine days. IndyMac Bancorp in Pasadena, California, collapsed in July after customers removed $US1.3 billion in two weeks.

The surge in Sovereign's withdrawals probably led regulators to push it into the deal with Santander, KBW Inc. analyst Robert Hughes said in a note to investors today. ``This was likely exacerbated by a crisis of confidence on the part of depositors,'' he wrote.

`Safety and soundness'

``A lot of small banks are losing business transaction accounts like payroll accounts,'' FDIC Chairman Sheila Bair said in a Bloomberg TV interview today. ``They typically have to be about the $US250,000 limit. They're losing these accounts to much larger institutions, even though the smaller banks are quite healthy and viable.''

Sovereign, the largest US savings and loan after the demise of WaMu, blamed ``intense deposit competition as well as general safety and soundness concerns following the failure of IndyMac'' for the increase in withdrawals. Sovereign, based in Philadelphia, has 750 branches in the northeastern US

Wachovia Corp., which last week agreed to be bought by Wells Fargo & Co., lost as much as $US5 billion in a single day, Sept. 26, Citigroup Inc. global banking head Edward Kelly said in an affidavit. Kelly filed his statement in connection with the lawsuit Citigroup is pursuing against Wachovia, which initially agreed to a merger with the New York-based bank.

Limits increased

Wachovia spokeswoman Christy Phillips Brown declined to comment on Kelly's affidavit. The Wachovia withdrawals were reported earlier by the Charlotte Business Journal.

The FDIC earlier this month increased its insured limit on bank customers to $US250,000 from the $US100,000 mark set in 1980, aiming to ``help consumers maintain confidence in the banking system and the marketplace,'' FDIC Chairman Sheila Bair said on Oct. 7. The FDIC said today it will also temporarily guarantee new senior unsecured debt such as commercial paper and transfers between banks.

The agency in August said 117 banks were classified as ``problem'' in the second quarter, a 30% jump from the first quarter. The agency doesn't name the ``problem'' lenders.

Downey Financial

Downey Financial Corp., a Newport Beach, California-based savings and loan, said in August that it had seen ``elevated'' withdrawals after reporting a fourth straight quarterly loss. Downey has lost 95% of its market value in the past year.

``A lot of people hear those stories or read about those events and are not sure frequently about the safety of their deposits, even people that see the sign -- FDIC Insured'' Barth said. ``There's a bit of scaremongering taking place.''

Moody's Investors Service said the FDIC's announcement moves the risk from the banks to the regulators and should help institutions dealing with small businesses ``that had proved to be confidence-sensitive.''

Regulators are essentially trying to ensure ``there's not a run on small banks,'' said Joel Isaacson, president of financial-planning firm Joel Isaacson & Co. on New York's Fifth Avenue.
`
`I assume every small business is looking, just making sure their cash is safe,'' Isaacson said. ``That's the one thing you can't screw around with. No one wants to put their cash at risk.''

Bloomberg News