By Howard Headlee, President of the Utah Bankers Association

As the economy has faltered over the past several months, there are many voices in the media that have emerged as economic experts, especially in the area of banking. I am sad to say that much of the reporting, especially at the national level is consistently unreliable.

It is critical for bankers and their staffs to have access to the facts. Here are a few of the more important clarifications.

1.        The term “bank” can only legally be used by an institution that has applied for and received a charter from the Federal Deposit Insurance Corporation (FDIC). Banks can offer their depositors FDIC insurance on money their customers place in deposit. All year long, the media has erroneously used the word “bank” to describe institutions that are financial in nature, but NOT banks. For example, Bear Stearns was NOT a bank. In a recent issue of the Deseret News the AP ran story about salaries and bonuses at “banks” and nearly every example noted was NOT a bank. Basically the media refers to any institution that is involved in financial services as a “bank”. 

2.       FDIC insured banks were generally NOT involved in making sub-prime, risky, and ill-advised mortgages to people who could not afford them. There were a couple (not in Utah) and they have failed, but for the most part, Utah banks were not involved and have not been directly impacted by the default of these mortgages. Indirectly, Utah banks have been impacted by the resulting downturn in housing as we did finance much of the building and development of homes in Utah.

3.       Utah banks are very strong and continue to lend as aggressively as is prudent in this environment. Contrary to public statements, lending at many Utah banks is actually higher than last year. Banks are aggressively pursuing credit worthy lending opportunities; however, it is not in anyone’s interests that they begin to make imprudent loans.

4.       Real FDIC insured banks were not bailed out by the U.S. Treasury! Initially the Treasury intended to use the TARP money to buy “toxic” mortgage assets. Because most Utah banks had nothing to do with these assets, they would not have been directly involved in this plan. However, the Treasury changed its mind shortly after Congress approved the measure. At first the Treasury DID make loans (termed Bailouts) to troubled financial companies (such as AIG- not a “Bank”!) but then the Treasury decided to try to “stimulate” the economy by investing the TARP monies in HEALTHY BANKS. Troubled banks need not apply for this money, because the Treasury made it clear they would only invest in banks that are healthy and ready to use the additional capital to make loans in their local communities. We are still in the application and review stage. Even the earliest recipients (the largest banks) have only had this capital for less than 30 days.

5.       The TARP monies are an investment and must be paid back with interest. Because they are only being invested in healthy banks, it is highly likely taxpayers will be made whole. It is not in anyone’s interest for banks to use this capital to hastily make bad loans. This plan might work if Congress and regulators demonstrate the appropriate discipline to invest the money and then let the banks do what they do best: deploy the capital to its highest and best use in our local communities over the next few months and years (not days and weeks.) But if they use this investment as a foothold to start telling banks how to do their job, it will be a disaster.

6.       Banks do not lend the capital they receive from the TARP. Instead banks leverage this capital up to 10-12 times by collecting deposits which are lent in local communities. The full impact of the TARP will not be felt until we are able to collect more deposits and then have the time to identify and underwrite prudent loans.

Rest assured, Utah’s banks are well prepared for this downturn. Despite all the rumors, we are still talking about earnings being lower than previous years, not losses. Nonetheless, Utah’s banks are at the “Heart of our Community” and we are centrally connected to the struggles and challenges faced by all Utahns.   As you know, Utah is performing relatively well compared to many other states, even most of our neighbors. So when I see the strength in our banking community, I am confident that we will continue to out-perform as we proceed through our recovery.