The countdown to December and the date that could alter our future is on. Have you started thinking about what you’ll do if the prognosticators are right? Do you have contingency plans? Will you remove your money from the neighborhood bank? After all, the impending elimination of Federal Deposit Insurance Corporation (FDIC) insurance on small business bank accounts is no joke (raise your hand if you thought I was talking about the Mayan prediction that the world will end on 12/12/12).
The fate of FDIC insurance on business accounts has certainly garnered less mainstream attention than the latest, greatest doomsday prediction, but with the more than 27 million small businesses in the United States employing half of all private sector employees, according to the U.S. Small Business Administration, it’s certainly significant nonetheless.
You see, the government started a program in 2008 to provide unlimited insurance for funds held in non-interest-bearing small business bank accounts so as to encourage business owners to continue using community banks during the downturn. However, the program is set to expire on December 31, 2012, and if it’s not renewed, small banks fear a max exodus, which would cripple their ability to make consumer loans.
The domino effect speaks precisely to how banks work. Small business owners tend to keep payroll funds in the exact type of account that will lose government insurance in a few months’ time. Banks rely on these funds to facilitate making loans to you and me, on which they charge interest and thereby make money. Banks are businesses, after all, and they do not have all of the money they lend locked in a vault in the back.
As George Bailey said in the iconic film It’s a Wonderful Life, “You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house…right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can.”
If December 31 comes and goes without an extension of the FDIC insurance, local banking institutions much like the fictitious Bailey Building & Loan could therefore be on their last legs. This speaks to the psychology of consumers in the too-big-to-fail era. Even though their money still wouldn’t be federally insured at a large national bank, small business owners are expected to make the switch due to the perception that funds would be safer at banks that have more robust financial backing, not to mention significant market share.
As we’ve seen in recent years, such institutions won’t be allowed to go under given the catastrophic effect that this would have on the overall economy. Therefore, even if a large national bank was in tough financial straits, the expectation is that a bailout would protect most customers’ money. The result of small banks going belly up would be limited to a slight decrease in local jobs, however, which means there would be no federal safety net.
It’s not December yet, however, which means a lot can change before the small business community pushes its collective chips to the center of the big bank table. It will be interesting to see what happens, to say the least, particularly since any inability of small businesses to meet payroll could set off a treacherous chain reaction of job loss in the still unstable economy.