The news Thursday and Friday of the closure by government authorities of two New York City banks -- LibertyPointe Bank and Park Avenue Bank -- got me thinking about the effect that the existence of deposit insurance has on how banks compete for customers.
Back in 2007, The Brooklyn Paper wrote an article describing LibertyPointe Bank as "A bank for Jews, by Jews." Said the article, "In Brooklyn's Orthodox Jewish community, the bank has its appeal. Zvi Bar-Levav, an Ocean Parkway resident and the owner of a software company, said he's drawn to the idea of banking with people he knows."
The article went on to quote "Meyer Eichler, Liberty Pointe Bank's vice-chairman and a prominent merchant of Judaica products," as saying that the only thing that differentiates banks these days is customer service. "In the end of the day, finance is finance," Mr. Eichler is quoted as saying.
Also in 2007, the New York Sun, where I was vice president and managing editor, ran an article about Park Avenue Bank. Headlined, "Banking on Art," the article reported that the bank included an art gallery to show works on loan from museums. "For the bank, the benefits are relatively simple: The gallery offers a gracious space to entertain clients and an introduction to potential new clients among the board members of participating museums, who are invited to the opening party," the article reported.
The existence of deposit insurance means that banks don't have much incentive to market themselves to customers on the basis of their financial soundness. A depositor is insured (at least up to the FDIC limit), no matter how shaky the bank's balance sheet. So instead of competing on the basis of how safe a depositor's money is in the bank, the banks compete on the basis of other things, like how Jew-friendly they are or how art-friendly they are. Meanwhile, the banks that don't fail are stuck paying insurance premiums that wind up paying for the losses incurred by the riskier behavior of the banks that do fail.