Earlier this week, the American Banker had one of the tables that usually induce somnolence. This one, though, caught our attention. The list of fastest-growing insured depositories showed one that wins the all-time prize for banking grasshoppers. GE Capital Financial, GE’s ILC, went up an astounding 10,000 percent year over year. We went digging in GE’s annual report to see why, finding that the company developed “alternative funding sources” – that is, brokered deposits – to fund its steam-shovels, locomotives and light bulbs. 10,000 percent is, though, a lot, especially when you add the billions in brokered deposits to the $139 billion to which GE also had a call in the FDIC’s TLGP. Going beyond the obvious conclusion that GE is a somewhat unusual bank, the sheer size of its enormous dive into brokered deposits tells us that huge risks remain in the banking system with which regulators have yet to reckon.
Last week, we talked about testimony in 2001 before Senate Banking on the then-historic failure of Superior FSB, going through some of the lessons that went unheeded until the crisis now upon us. One lesson we left out is the risk of meteoric size increases. At Superior FSB, the OTS was way behind the curve as the bank gobbled up risk, something OTS should have known better than to permit because of the hard lessons its predecessor, the FHLB, learned when S&Ls were permitted to triple overnight. In fact, Congress was so spooked by the S&L example that it required that regulators intervene. The regulators then decided that year-over-year asset hikes of thirty percent or more warranted supervisory intervention.
From thirty percent to 10,000 percent is, of course, a stretch. The initial growth-constraint regulation sadly joined all too many others in the rulebooks firmly closed as the “new paradigm” of banking took hold. GE isn’t the only institution that put pedal to metal as a look at IndyMac, BankUnited and some of the other large debris littering the FDIC’s junk heap shows. All of them also ramped up by gigantic amounts in the boom without hearing boo from the banking agencies.
GE will of course argue that it has all the necessary controls in place to ensure that it will wisely use billions of dollars in brokered deposits. We hope so. However, its unusual structure makes this, at the least, a challenge. When FDIC-insured and/or guaranteed money is used to fund loans or other bank assets, these reside on the bank’s books with (one hopes) capital to back them. When loans fund assets housed elsewhere in a non-banking parent firm, there’s no back-stop beyond capital within the bank itself and the parent firm’s best wishes.
We won’t challenge GE’s intention to support its insured depositories; indeed, we are sure these are wholly sincere, if only due to the profound reputational risk were they not. However, GE’s unique size and structure mean it can operate with impunity not granted to other industrial giants or to banks regulated at the parent level. If the Obama Administration’s proposal to end this doesn’t advance, then at the least Congress and regulators need to reckon with the behemoths they’ve created to avoid yet another repeat of costly lessons already learned all too often at far too much cost.