TIME Banks

U.S. Regulators: Wall Street’s Largest Banks Still Too Big To Fail

Bank Of America Reports Loss Due 6 Billion Dollar Legal Charge
Spencer Platt—Getty Images

The biggest banks still don't have adequate bankruptcy plans to avoid precipitating another economic crisis, said U.S. regulators

Eleven of the nation’s largest banks still do not have viable bankruptcy plans that would avoid causing widespread economic damage, U.S. regulators said Tuesday in a sweeping admonition of Wall Street’s giants.

The Federal Reserve and the Federal Deposit Insurance Corp said that the bankruptcy plans submitted by the 11 biggest banks in the United States fail to prepare for an orderly failure, have “unrealistic or inadequately supported” assumptions and do not properly outline changes in firm structure that would prevent broader economic repercussions.

“…[T]he plans provide no credible or clear path through bankruptcy that doesn’t require unrealistic assumptions and direct or indirect public support,” said Thomas Hoenig, the second-in-command official at the FDIC, in a statement.

Banks are required to submit an annual “living will” under the 2010 Dodd-Frank law, a legacy of the financial crisis of 2007-2008, in which the bankruptcy of Lehman Brothers was a precipitating factor in the economic crash that led to the Great Recession.

Regulators called for banks to create “living wills” to plan for a bankruptcy process that would not require the billions of dollars in taxpayer money doled out during the financial crisis, when many of Wall Street’s biggest financial institutions had to borrow billions from the Treasury to avoid disastrous collapse.

With Tuesday’s announcement, the large banks face the threat of tougher capital rules and restrictions on growth if they do not address the issues by July 2015.

“Too big to fail is alive and well. The FDIC’s statement that these living wills are not credible means that megabanks will live on taxpayer life support in the event of a crash,” said Sen. Sherrod Brown (D., Ohio), a proponent of legislation to increase capital requirements for the biggest banks, the Wall Street Journal reports.

Tuesday’s findings apply to banks with assets greater than $250 billion in assets, including Bank of America, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, Deutsche Bank, Credit Suisse, Barclays and others.

MONEY Banking

Stuck Paying Overdraft Fees? One Simple Rule to Not Be a Sucker

Hand holding large lollipop
Yulia M.—Getty Images/Flickr

A tiny portion of bank customers pays nearly three-quarters of all overdraft fees, to the tune of $380.40 annually per account—and some $31 billion total.

Before getting into the nitty-gritty of a new government report about overdraft fees, and before reviewing the recent history and some of the staggering statistics regarding these much-maligned bank fees, let’s cut to the chase and give some straightforward advice:

DON’T OPT IN to overdraft protection.

You may have done so after thinking that “protection” sounds like it’s good for you. Heck, you may have no idea that you’re actually signed up for such a service. (An overdraft, by the way, is when you pay for something with a check or debit card and don’t have enough money in your account to cover the tab, prompting a bank fee to kick in, likely in the neighborhood of $35. When you don’t have overdraft protection and don’t have a sufficient account balance to cover a purchase, your card will be declined, and there will be no fee assessed.) If you’re not sure, check with your bank to check your status. And whether you’ve opted in consciously or unwittingly, give serious thought to opting out. Like, now.

Okay, now that that’s out of the way, let’s run through how we got to where we are today, and why even as reforms have helped consumers save money, they come up way short compared to how consumers can help themselves.

The total amount and frequency of customers paying overdrafts have been declining. American customers collectively paid a whopping $37 billion in 2009 in overdrafts, one of the more outrageous factoids helping to bring about the creation of the CFPB (Consumer Financial Protection Bureau), as well as the Occupy Wall Street protests. After rules were put in place requiring bank customers to opt in to overdraft protection, rather than be signed up automatically for it, the total shrunk to $31.6 billion in 2011, and remains at around $31 billion annually.

On the one hand, consumers are paying $6 billion less in overdraft fees compared to five years ago. On the other, we’re still paying $31 BILLION each year on a fee that bank reforms were supposed to rein in. Why is the figure still so high?

A study released last week from the Consumer Financial Protection Bureau provides some answers. The vast majority of bank customers actually pay no overdraft fees whatsoever. Seven out of ten accounts incur zero overdrafts annually, and 82% of customer accounts are hit with three or fewer overdrafts per year.

Therefore, it’s a very small portion of customers who are paying the lion’s share of overdraft fees. According to the CFPB, 8.3% of bank customers overdraft more than 10 times annually, and they’re collectively responsible for a mind-boggling 73.7% of overdraft fees collected by banks. Who are these people, who pay on average $380.40 in overdraft fees? The data in the report reveals a profile of the prototypical frequent overdrafter:

They’re young and inexperienced. Nearly 11% of customers ages 18 to 25 have 10+ overdrafts annually, compared to less than 3% of those age 62+.

They make small, frequent purchases with debit cards. Consumers who use their debit cards more than 30 times per month were more likely to be frequent overdrafters, with 18% incurring 10+ overdrafts per year. And the purchases that sent them into a negative balance tended to be small, with a median amount of just $24.

They pay back the money soon. More than half of accounts are back in a positive balance within three days, and three-quarters are positive within a week of overdraft. This tells us that an overdraft is often a matter of sloppiness—absentmindedly paying for a small purchase without realizing the money wasn’t there to cover the bill, then quickly making a deposit or transferring money from another account to get out of a negative balance. By then, however, the customer has already been hit with a fee (one likely higher than the median $24 mentioned above), and paid back a loan that equates to an annual rate of 17,000%, as the CFPB put it.

They’ve opted in. Well, duh. A little over 14% of bank customers have opted in to overdraft protection, and unsurprisingly, they tend to get hit with more overdraft fees. (In unusual circumstances, overdraft fees can be assessed even if you haven’t opted in.) The average checking account that has opted in is hit with $21.61 in overdraft fees monthly, compared to $2.98 for those who haven’t opted in. What’s more, those who opt in tend to pay more in other kinds of bank fees too, including maintenance and ATM fees.

If the portrait above sounds like you, the obvious advice is that it’s high time to start paying more attention to where you bank, how you spend, and whether or not you’ve opted in to overdraft protection. If you have, OPT OUT.

MORE:

TIME Banking

How Big Banks Are Finally Getting It Right

It was known as the $39 cup of coffee: Swipe your debit card to pay for your latte and drop your bank account balance into the red, triggering an overdraft fee in the process. Now, that exercise in frustration might finally be getting a rest: New data shows that more Americans will be able to dodge that $35 bullet, especially if they have an account at a big bank.

Overdraft fees were the bane of customers’ existence, but are a revenue lifeline for banks and credit unions, especially after regulatory credit card crackdowns limited how much they could earn from those. They earned around $32 billion last year off our careless swiping — and that was three years after federal reforms that prohibited financial institutions from automatically subjecting people to the fees kicked in — so these fees seemed destined to stick around, no matter how much we hated them.

New research from financial research company Moebs $ervices finds that something interesting is happening, though: Overdraft fees are there, but increasingly, banks and credit unions are waiving them if the customer just drops into the red by a small amount — say a cup or two of coffee.

We seem to be at a tipping point: Just over half of financial institutions with more than $50 billion in assets waive overdraft fees for small-dollar transactions, with an average cutoff amount of a little over five bucks.

Across all financial institutions, Moebs finds that just over one in four have a small-dollar overdraft waiver in place, with an average cutoff amount of $7.40, although cutoffs range from a single dollar all the way up to $50.

Smaller banks and credit unions are least likely to extend these waivers for low-amount overdrafts: Only about 15% of institutions with $100 million or less in assets offer them, and just under 11% of credit unions.

CEO and economist of Moebs $ervices Mike Moebs says that although smaller institutions might not have these policies on paper, it’s likely that they might extend waivers when customers call and ask.

Aside from the threat of further regulation, Moebs says bank technology has improved so institutions can get more detailed with their parameters. He says consumers have been demanding more customer-friendly features (and regulators have been listening to their complaints).

The dearth of paper checks helps, too, he says. “[The] lack of float due to only about 10% of payment system is paper checks is another factor.” With money moving from one place to another pretty much in real time, it’s easier for banks to be a little more flexible.

There are some distinct regional differences in Moebs’ data. Kentucky and New Hampshire residents have better than a 50% shot of getting their small-dollar overdrafts waived, versus fewer than a 20% chance in Florida, Maryland, Nevada and Wisconsin. There’s a similar split among metro areas, ranging from zero in Denver to 44% in San Antonio. (The overall averages are higher because banks in rural areas are more likely to offer waivers than those in urban or suburban settings.)

Here, Moebs says local competition is a contributing factor. If one bank offers a waiver, especially one with a higher amount, its competitors will feel pressure to follow suit.

MONEY Advertising

Best ATM Ever Gives Away Free Trips to Disney, Flights to Caribbean

screenshot from TD advertisement

This viral "Automated Thanking Machine" video will warm your heart, despite the unlikelihood of any bank ever being this nice to you.

Visit the typical ATM and all you come away with is some of your own money, and perhaps a bitter taste in your mouth after coughing up a $3 fee.

Some very special ATMs set up by TD Canada, however, have been giving customers a whole lot more—like the opportunity to toss out the opening pitch in a Major League Baseball game, and a free trip to Disneyland for a single mom and her kids.

In this highly unusual case, the ATM acronym stands for “Automated Thanking Machine,” and TD Canada secretly recorded a bunch of customers on video while they’re receiving their very special gifts. It was edited and put into a YouTube ad that was posted last week and has generated more than 3 million page views.

It may seem like there are some privacy concerns. The bank bizarrely knows all sorts of intimate details about these customers’ private lives. For instance, it’s no coincidence that the guy who gets to throw out the opening pitch to Jose Bautista at a Toronto Blue Jays game just so happens to be a huge Blue Jays fan.

The robot-like voice emanating from the machine also gets into a deep conversation about how one elderly woman has a daughter in Trinidad who is stricken with cancer. Creepy, right? But when that voice announces that the bank is giving the woman a free flight to see her daughter, the heartwarming, tear-inducing scene that results apparently is enough to cast aside any qualms about invasion of privacy.

It turns out that the banks gathered information about these customers the old-fashioned way–with local staffers asking about their lives–rather than sneakily via reviewing Facebook accounts or scanning customer purchase histories. Most banks and companies use our personal information to try to sell us more stuff, but in this instance it was used to pick out the perfect, incredibly thoughtful gift. See for yourself.

MONEY Banking

Why People Mistrust Financial Advisers

Untrustworthy businessman crossing fingers behind back
RubberBall Productions—Getty Images/Vetta

A financial planner says people can be cynical about her work. Her own experience as a bank customer helps explain why.

Very often, we financial planners convey the impression that getting your financial life into shape is easy. And that we’re in control of our finances.

If we had a bit of humility, we’d admit that we share the same frustrations as our clients.

Like dealing with low interest rates on checking accounts in combination with high banking fees.

“You get interest on this account,” the customer service representative from my bank said. This was about a month ago. I had called the bank upon receiving my monthly statement.

“Yes,” I replied. “I got a penny last month. A penny. And now you want to charge me $25 a month to have a checking account?”

She had to laugh.

I was calling to ask why a $25 charge had shown up on my formerly free checking account.

She asked if anything had changed. It had. I had paid off all my big debts. I was in much better financial shape.

Well, that explained it.

Now that I had repaid my loans to the bank, apparently my relationship with it wasn’t sufficient to earn me free checking. I was no longer paying the bank large amounts of interest, so it would start charging me this monthly fee. That is the way it works.

If this makes sense to you, you must be a banker.

Okay, that was a low blow. But for me, it’s an example of why so many clients have a bad attitude toward financial services institutions and professionals.

It’s not just the malcontents, it’s everyone. The surveys confirm that the public does not hold financial services institutions in high regard.

Many of my clients been burned before. And they’re probably still getting burned by such ridiculous tactics as fee-ing the customer to death or the inability to get a new mortgage or a small business loan without a dossier three feet thick that proves you do actually pay your bills.

I told the woman on the phone, “I just opened two checking accounts at another bank for my twin daughters. The other bank is going to charge $12 a month for each account. And as soon as my girls go show their college IDs, the accounts will be free. So tell me why I should pay you $25.”

I spoke politely, without a trace of anger.

Eventually, the customer service representative found a way to give me some credit for direct deposit of my paycheck. And she switched me to an account that will ding me only $7 a month.

Of course, if the bank had wanted to provide the best deal for a longtime customer, they could have recognized this direct deposit before. But they hadn’t. They had just slapped a fee three times larger than on my new account, perhaps hoping I wouldn’t find out how I could save some money.

Cynicism? Anger? The emotions that I feel are the same ones that people have when they approach me as a professional. As a certified financial planner I have much larger ideas that I need to convey to our customers and the general public than “I won’t cheat you or slip in something that benefits me and not you.”

But it’s tough to get through all that dreck first and get on to the important ideas.

I told the customer service representative that I didn’t mind giving up the penny in exchange for a lower monthly fee.

When I told this anecdote to one of my partners, he just had to raise the ante. “Last month, I got three pennies,” he said.

Another happy financial services customer.

———-

Harriet J. Brackey, CFP, is the co-chief investment officer of KR Financial Services, a South Florida registered investment advisory firm that manages more than $330 million. She does financial planning for clients and manages their portfolios. Before going into the financial services industry, she was an award-winning journalist who covered Wall Street. Her background includes stints at Business Week, USA Today, The Miami Herald and Nightly Business Report.

TIME Drugs

House Votes to Help Pot Businesses Use Banks

Rethinking Pot Border Town
Customers gather at a medical-marijuana store on July 9, 2014. Zachary Kaufman—AP

But the measure may stall in the Senate

The House of Representatives on Wednesday passed one measure designed to help legitimate marijuana businesses gain access to the financial system, and rejected another that would have blocked them from doing so. But the votes may not force a resolution to the cannabis industry’s long-running fight to bank its cash.

The House easily approved an amendment to an appropriations bill that would bar regulators from punishing banks who transact with legal marijuana businesses. The measure, which passed 231-192, is designed to ease the fears of financial institutions, who mostly eschew pot clients, even in states that have relaxed marijuana laws, because the drug remains illegal under federal law.

In the other vote, the House rejected an amendment sponsored by a conservative Republican that would have blocked the implementation of Treasury Department guidelines, issued earlier this year, that gave a yellow light for banks to accept legitimate cannabis clients.

Industry activists hailed the votes as a major triumph. “This is a huge step forward for the legal cannabis industry,” Aaron Smith, executive director of the National Cannabis Industry Association, said in a statement. “Access to basic banking services is one of the most critical challenges facing legal cannabis businesses and the state agencies tasked with regulating them.”

Pro-pot votes in the Republican-controlled House are another marker of just how mainstream marijuana is becoming. But they are not necessarily a sign that the banking issue will be resolved anytime soon.

A bill to open the banking industry to pot clients would still have to clear the U.S. Senate, which is no easy feat for far less controversial legislation. There is no guarantee the measure will come up for a vote in the midst of a contentious election season, with control of the chamber up for grabs. And some legislators from both parties oppose opening the financial system to marijuana money. After the Treasury guidelines were issued, Sens. Dianne Feinstein (D-Calif.) and Charles Grassley (R-Iowa) co-authored a blistering letter arguing that the department had “severely undermined” its mission.

“Following the guidance may expose financial institutions to civil or criminal liability,” Feinstein and Grassley wrote. “Congress and the President may reconsider marijuana’s legality, but until federal law is changed, selling marijuana, laundering marijuana proceeds, and aiding and abetting those activities all remain illegal. Far from clarifying the obligations of financial institutions, FinCEN’s guidance appears to create uncertainty where none had existed beforehand.”

Multiple Democratic Senate aides did not immediately respond to questions about the measure’s chances of passage in the upper chamber. Without Congressional approval, banks are unlikely to take the risk of changing their policy.

TIME Management

JP Morgan CEO Has Throat Cancer

Jamie Dimon told employees the disease is “curable”

Investment banking firm JP Morgan’s CEO Jamie Dimon told staff Tuesday that he has throat cancer.

“The good news is that the prognosis from my doctors is excellent, the cancer was caught quickly, and my condition is curable,” Dimon, CEO of the bank since 2005, said in a note to staff.

Dimon said the disease will require about eight weeks of radiation and chemotherapy treatment, CNBC reports.

“I feel very good now and will let all of you know if my health situation changes,” he said.

Dimon steered JP Morgan through the financial crisis but met with controversy after the bank was involved in a scandal in 2012, leading to billions of dollars in losses and calls for Dimon’s ouster. The notoriously blunt bank chairman was criticized for calling the fiasco a “tempest in a teapot.”

[CNBC]

MONEY Leisure

WATCH: George Takei Talks Marriage, Money, and the Right Way to Pronounce His Name

Actor George Takei tells Money's George Mannes how he handles his finances — and how he's fighting rising ticket prices on Broadway.

MONEY Careers

Work for the Man? That’s So Over, New College Grads Say

With banks dissing them and peers largely underemployed, Millennials are finding an alternative financial future.

Big companies still have many high-paying positions, and with the job market perking up those opportunities will expand. But young adults are still having trouble establishing basic financial security—or landing a decently paying entry-level job. Instead, they are forging different paths to financial success.

This search for alternatives starts with checking and saving. Banks haven’t figured out how to serve this new generation. Millennials have big debts from college, and instead of a single, steady full-time job, a recent grad may have four or five paying gigs. Banks can’t fit them into an existing box. But this new generation still needs credit and banking services.

Faced with this inflexibility, one third of Millennials seek to cut ties with traditional banks and financial companies, according to market researchers. Half say they are counting on start-up firms to overhaul how banks work, and 75% say they would prefer financial services from the likes of Google, Amazon, and PayPal. They are also turning to alternative financial firms like Square, Betterment, Robinhood, and Wealthfront to manage their payments and manage their money.

In their search for financial options, young adults are also finding new ways to launch their careers. Millennials have seen under-saved Boomers delay retirement, while corporations have shed workers and their peers are settling for jobs below their ability. As a solution, more twentysomethings are turning to entrepreneurship. Six in 10 recent college graduates are interested in starting a company, according to a new survey by CT Corp., a small business services firm. Those results mirror similar findings by other polls.

Entrepreneurial pursuits offer the potential to put individuals squarely in charge of their future. This is the mindset that the Thiel Foundation capitalizes on with its 20-under-20 fellowship, which seeks to develop entrepreneurs right out of high school and convince them they don’t need college or the student debt that comes with it.

The problem is that while many recent college graduates say they want to be their own boss, a large portion doesn’t really understand what that entails. So while 61% say they’d like to start a company, only 45% believe it’s feasible, CT found. Meanwhile, 67% display a knowledge gap around practical aspects like incorporating, registering a business name, securing a domain, and marketing their products or services.

Still, the entrepreneurial spirit runs deep in this crowd. One in five recent grads started a business while in college, and even among those who don’t believe they’ll ever start a company a third dream about doing so. More than half believe that being their own boss offers greater rewards and more financial security over the long run. Let’s hope they are right because in the new normal this is the path often taken.

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