So I was walking along in Harvard Square when I saw the following:
(For context, it must be noted that there are like 800 banks in the middle of Harvard Square. I’m not sure why this is, especially since they crowd out the places that you need in order to spend the money thay you are putting in the bank, at least temporarily.)
First off, I think it is funny that something called Sovereign Bank is advertising that it’s part of something bigger (the Spanish company Santander Group in case you were curious). But more importantly, how is it really helpful that it is “one of the world’s safest banks”? (For the record, I couldn’t read the tiny footnote that backs up that claim even when I was standing in front of the sign.) The whole concept of FDIC insurance means that it is largely irrelevant to the consumer whether or not a bank fails. Furthermore, the rules of what is and is not insured were chaged recently such that checking, savings and even money market checking are insured up to $250,000. (Things like Certificates of Deposit are also insured.)
Perhaps the bank is trying to lure in customers that would surpass the $250,000 limit- no wait, that doesn’t make sense, since I am guessing that high net worth individuals are not so much impressed by a sign on the sidewalk. Perhaps the intention is to sell products that are not FDIC insured, such as mutual funds…but you will notice that the sign is advertising checking accounts. Hm.
What is the lesson for the consumer here? First, don’t get sucked in by a value proposition that is largely irrelevant. Second, as an important corollary, definitely don’t accept a lower interest rate (on an insured account) for the privilege of being with a “safe” bank. We know that people are scared about the fate of their money, but seriously, don’t be dumb. These banks seem to be looking for ways to poach customers in an industry where individuals are usually pretty complacent.
In my incessant Googling to try to make sense of this matter, I realize that I am not the only economist to be confused by this particular issue. Apparently Paul Krugman is in good company. 🙂 (For the record, I saw it first- April 16th to be exact- I’m just slow with the posting sometimes. I’ll work on it.)