Citibank is having an interesting week. First they apparently had two different employees tell a website owner his account was frozen because they found objectionable content on his web page. Now Citibank customers are concerned over a notice suggesting they may have to give a 7-day advanced noticed before withdrawing funds. In a statement hearkening to the bank runs of the Great Depression, Citibank assures customers they do not plan to exercise this right, but would like to note they have it. So what does this all mean?
Firstly, let’s look at the facts. According to Citibank representatives the notice is mundane in nature, and due to their recent deal to change how the FDIC treats some of their accounts. The FDIC is the program that backs banks with government dollars in the event of failure. Indeed the FDIC requires banks to reserve this right dating back to the 1933 crash. The rule is intended so that in the event of a bank run, it’s not simply a first come first serve free for all as to who is able to withdraw their money. Of course Citibank assures there is no chance of a bank run, and they were merely notifying their customers so as to be extra honest.
Without questioning Citibank’s motives, how possible is a bank run, or a more likely liquidity crunch that would require taking advantage of this rule? Well, a liquidity crisis is not unheard of recently. The banks that had to go to the government for loans were in many cases doing so because they didn’t have enough cash on hand to meet current obligations. As mortgage holders stopped being able to pay their mortgages banks that had planned on having those funds to pay their bills required extra cash to make ends meet.
Part of the problem is something called fractional lending. Many assume the bank cannot lend more money than it has deposited. This is not the case. Banks are able to legally lend several dollars for every dollar they have on deposit. Normally there are several checks within the financial system that help to ensure they still always have more than enough dollars to pay for withdrawals. Normally, however, most customers do not require significant amounts from their accounts at the same time.
While the idea of telling customers they cannot have the money they legally own may seem frightening, it really is designed to help customers. During the bank runs of the Great Depression those customers who got wind of a bank’s financial troubles got in quick to get their savings before the bank ran out of money. This rule was established, along with the FDIC, to help make sure that customers had a fairer chance at receiving their funds at all, as well as to help prevent potentially solvent banks from being wiped out by a sudden irrational panic. Also, Citibank’s change with the FDIC actually provides unlimited protection on some accounts. Certainly all this is in the customer’s best interest.
The curious thing though, is why Citibank would mention it. Yes, the change requires they reserve the right to ask for written notice of withdrawals 7-days in advance, but, as near as I can tell, there is no rule saying they have to make a special notice of it to their customers. In fact, many, if not most, banks that deal with the FDIC require this, and have not gone out of their way to advertise the fact. While I do not seriously believe that Citibank is planning to hold onto their customer’s funds for seven days, it is a sign.
The financial crisis made it clear that the financial industry is not nearly as solid as the huge marble columns on Wall Street might suggest. Citibank is if nothing else saying that they are not ruling out a repeat. If one of the largest banks it the world isn’t convinced there are not more troubles on the horizon it certainly means consumers shouldn’t assume so either.