If I were either among BofA, Citibank, or Chase, (we can simply call them by their industry association name, the American Banker's Association or ABA) I would be shit-scared right now. Not necessarily over the Bank Transfer Day itself, but what it represents: decentralized-yet-coordinated mass bank runs. Today we have an added twist, and to understand it I need to explain to you the meaning of something called "reserve requirements".
Banks earn most of their money from interest paid out by us consumers and business operators on loans we take out, whether for homes, student loans, or for our businesses. There is a limit imposed by federal law to how much money a bank can loan out. If a bank is fortunate enough to maintain, say, a hundred million dollars in the form of 'demand deposits' which is to say, cold hard cash readily available for consumers to take from the ATM at their leisure, then that bank is equipped to issue one billion dollars in interest-earning loans. In issuing those loans, the bank is maintaining something called a 10% "reserve requirement". This means that the demand deposits are 10% of the loan book's size.
Now the reserve requirement is something that the Federal Reserve under Ben Bernanke has control over. As opposed to the example above, it's not fixed at ten percent exactly, but varies, generally between ten and twenty percent. It's one of a few levers of monetary policy the Fed has to influence the nation's economic activity. (Yes, the Fed wishes those levers were more effective than a rusted car's unhinged steering wheel, but that's another story for another time).
If a bank's reserve amount compared to it's outstanding loans falls below the federally mandated reserve requirement too far for too long, then we're far beyond the mild inconvenience of reduced earnings. Instead, now the FDIC is required by law to send their agents in, discharge the bank's managers, and put the bank into receivership. Particularly their goal is to find a new buyer for the bank. Remember Washington Mutual bank? This happened to them in September 2008, and they were bought by Chase. FDIC did it's job well.
Now for the twist: Like most businesses, banks rely on a certain degree of historical statistics to stay afloat. They know from long experience that on average, the masses don't simultaneously come knocking on their door demanding to withdraw their funds. The exception to this rule is something called a Black Swan event. A Black Swan event is glibly summarized by any unlikely scenario that suddenly becomes unexpectedly inevitable. Where this happened in the form of the Depression and its associated bank runs, the big banks now feel (at least they certainly hope) that the government's Federal Deposit Insurance Corporation formed post-Depression to guarantee people's deposits up to a couple hundred thousand dollars, reduces peoples' tendencies to get panicky and initiate a bank run.
Twitter changes all that. Twitter followers via hashtags such as #banktransferday (just search for that keyword, pound and all, on www.twitter.com) can initiate a Black Swan event at the stroke of a key. Historical statistics be damned: How will banks expect themselves to carry on normal business under the current regulatory regime when they can be shot out of the water after a few short weeks of spontaneously-initiated Twitter-based word-of-mouth-building?
So what does the future predict? Well, the #OccupyWallStreet-ers will withdraw their funds from the bank, but the effect will be modest enough that banks will have time to react - including reducing teller availability to stem the rate at which people can close their accounts, as well as initiating periodic traffic 'outages' on their online banking for outgoing transfers. These inconveniences would have the effect of discouraging the non-die-hard Twitter-organized bank runners. However the #Occupiers will have successfully forced the banks to originate fewer new loans, and thus their new revenue generating capability will have been effectively stifled.
On November 5th The ABA will learn this sting of a lesson in social networking, and will know that their member banks came dangerously close to getting raided by the FDIC, getting put into receivership. So I highlighted what ABA would probably initiate among its member banks in the short run, but what will they do in the long run? Well over the next months, expect the ABA to lobby hard on Ben Bernanke's Fed as well as Congress to loosen reserve requirements or otherwise allow them to temporarily swing below the minimum requirement level for longer durations. This can give ABA member banks time to get new infusions of cash from the Fed (or from Warren Buffett ).
And they'll be doing all this quietly because they don't want to provoke another, larger Twitter-juiced bank run . Who's got the upper hand in this struggle? The #Occupiers by far. It may be the only ace they have to keep bank fees and interests rates reflecting the true costs of administering loans and money circulation instead of the ABA member banks' shareholders' inflated sense of expected returns. But boy is it a damn powerful one.
