Ethics of Where You Bank

There has been much debate lately about Arianna Huffington’s “Move Your Money” campaign, where she asserts:

If enough people who have money in one of the Big Six banks (the four we mentioned earlier, plus Goldman Sachs and Morgan Stanley) move it into smaller, more local, more traditional community banks, then collectively we, the people, will have taken a big step toward re-rigging the financial system so it becomes again the productive, stable engine for growth it’s meant to be.

Martha White concludes “This is a great example of populist indignation made practical” and Yvette Kantrow feels that Huffington is “turning the decision on where to bank into a moral choice, like being green or buying organic.” She further adds “Banks make their money in a lot of ways, such as by collecting fees. For instance, banks are projected to collect $38.5 billion in overdraft fees this year, some 90 percent of which is paid by only 10 percent of the customer base.”

Mike Konczal shows us mathematically how a few poorer customers subsidize the costs of the non-revolving ‘prime’ customers in credit cards, and the same can generally be said for deposit and savings account as the “non-revolving ‘prime’ customers” also antidotal pay fewer overdraft fees.

Assume three things for a moment: (1) that you are a subsidized customer, (2) you feel the need to support a non-“Too Big to Fail” institution, and (3) like organic foods you are only willing to ‘pay’ 20% more (or receive 20% less) than the generic product. What is the moral, financially savvy customer to do? Is it wrong to continue to benefit from a system you believe is morally bankrupt?

If you are legitimately a subsidized customer paying less than fifty dollars in fees and interest, keeping low cash balances and paying your credit card in full every month, moving to a smaller institution may have a negative net benefit for that institution as the costs to service your account outweigh the benefit to the institution. But if you remain at a “Too Big to Fail” institution you are enabling a way of business that you don’t morally agree with.

I only see one strategy for dealing with this scenario; stop viewing it as a zero sum game. Here’s how:

1. Move your profitable (for the bank) accounts to the smaller institutions – generally your CDs, your term loans and your business accounts. Long term money such as CDs give the smaller institution money to make good loans to the local community. Term loans are typically profitable – it is the other side of the equation for how banks make money. Business accounts are also typically more profitable for the institution and you are more likely to be willing to pay fees for essential services on these accounts and not receive interest.
   • This also saves you the big hassle of “changing banks” for your most frequently used accounts, which is arguably the biggest hurdle
   • Also, don’t use brokered deposits (i.e. CDs you would buy through your stock broker) as they are unhealthy for the system and promote inorganic growth and/or bubbles.
2. Support legislation that levels the playing field between large and small institutions. Right now “Too Big To Fail” institutions enjoy a significantly lower cost of funds that smaller institutions, even adjusting for risk of failure, because of the implicit government guarantee. There isn’t any up for a vote now, and any movement for reform is quickly losing steam, but Megan McArdle and I agree how it should be done.

What is your view?