March 25, 2009 10:12 ET
Analysis Shows Megabanks Have 23,000 Times More Exposure to Credit Default Swaps Than Community Banks
Healthy Community Banks Unfairly Impacted, and Consumers Should Heed Wake-Up Call
AUSTIN, TX--(Marketwire - March 25, 2009) - As the economic crisis puts a spotlight on the
obscure world of credit default swaps (CDS), an unregulated $62 trillion
market that most people never heard of and even fewer understood, the fear
of a CDS catastrophe is haunting the country's largest banks, and the
nation's healthy community institutions and consumers are paying the price.
An analysis of FDIC data as of 12/2008 conducted by BancVue
(www.bancvue.com), a leading provider of products and consulting to
community banking institutions, shows that commercial banks $10 billion or
larger have just over $24 worth of credit derivatives for each dollar of
equity. By comparison, the rest of the industry has essentially one-tenth
of a penny of CDS for each dollar of equity. Those numbers translate to the
big banks having roughly 23,000 times as much credit derivative exposure
versus all other community financial institutions.
This comes at a time when megabanks are already reeling from write-downs on
mortgage-related securities. "These are the same institutions that
themselves have either directly or through subsidiaries invested in the
subprime market," said Don Shafer, Chairman of BancVue. "After suffering
losses all over the place, the megabanks are now waiting for the next shoe
to drop. In the meantime, it's placing an undue burden on healthy small
banks and should serve as a wake-up call to consumers."
Since the mortgage-backed securities that many swaps were supporting began
to lose value in 2007, investors have feared that the swaps, originally
meant as a hedge against risk, could suddenly become huge liabilities.
While the CDS marketplace is completely unregulated and the swaps trade
without a central clearinghouse, it's known that commercial banks are among
the most active participants. According to the Comptroller of the Currency,
JP Morgan Chase, Citibank, Bank of America, and Wachovia were ranked the
top four most active players.
In February, federal regulators facing a cascade of bank failures depleting
the deposit insurance fund raised the fees paid by U.S. financial
institutions. Although the FDIC intended on charging more from higher risk
banks, they also suggested levying a hefty emergency premium in a bid to
collect $27 billion this year. The higher premiums being assessed were
originally set for 20 cents for every $100 of insured deposits levied
equally on the 8,305 federally insured institutions. To put that in
perspective, for a $250 million community bank, the "one time tax" would
constitute a $500,000 hit, which could wipe out 20% to 40% of a bank's
annual profits. At the Independent Community Banking Association
Convention last week, FDIC Chairman Sheila Bair predicted that the
assessment will probably be lower. She went on to say that the FDIC is
seeking comments on whether the agency should use total assets or some
other base for the special assessment, which would have consequences for
how the burden is distributed.
"How about basing part of the assessment on the amount of credit
derivatives a bank holds compared to their equity?" continues Shafer,
referencing BancVue's research showing the extraordinary exposure to CDSs
of the megabanks versus the community financial institutions. "If you are
going to unfairly burden smaller banks that played by the rules, the least
the FDIC can do is base the levy on the banks that helped trigger the
Even amidst this threat and turmoil among the megabanks, consumers are
still trusting more than 70% of deposits in the U.S. to these large
financial institutions. "Americans appear to be paralyzed in their banking
relationship leaving so much of their hard earned cash in TARP and
CDS-laden megabanks. It's time for consumers to wake up and evaluate their
banking options, particularly when community banks offer a less risky
deposit alternative with better products and services," concludes Shafer.
BancVue is the leading provider of innovative software, marketing, and
consulting solutions to community financial institutions nationwide.
Serving nearly 600 community banks and credit unions around the country,
BancVue's solutions allow these institutions to compete and win in the war
for deposits. Consumers benefit from the development and implementation of
BancVue's innovative products, including REWARDChecking®, a free
high-yield checking account specifically designed for community banks and
credit unions. For more information on BancVue, visit www.bancvue.com.