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Fremont’s banks, businesses wary of bailout

7 October 2008 No Comment

By Karen Weise

While supporters hailed the government’s Federal bailout plan as an effort to benefit both Main Street and Wall Street, Fremont’s community banks, credit unions, and small business owners are not convinced.

“I think they’re really selling fear right now, and fear is a gateway to making a rash decision,’’ said Sumeet Khanna, founder of Skin Fitness Day Spa at the Fremont Hub.

The first part of the federal bailout plan, passed Oct. 3, strengthened the government’s protection against bank failure by increasing federal insurance on individual deposit accounts from $100,000 per account to $250,000 per account until the end of 2009. This protection through the Federal Deposit Insurance Coverage,  or FDIC, protects checking and savings accounts, money market deposit accounts, and certificates of deposit; it does not cover investment products such as such as stocks and bonds.

Supporters of the bailout said small businesses would particularly benefit because their payroll and other expenses require higher account balances than individual consumers typically keep. Community banks were also hailed as winners in the bailout plan because the FDIC insurance increase helps them compete against money-market mutual funds, which are not FDIC-insured, according to the New York Times. It also strengthens their reputation of stability during this time of declining consumer confidence in large banks, the New York Times reported.

Since Congress created the government-backed insurance, in response to bank failures during the Great Depression, the name FDIC has become nearly synonymous with consumer security, as evidenced by the FDIC signs hanging on every teller station in Fremont Bank’s main branch in downtown.

Sumeet Khanna doubts the bailout will help small business owners like himself.

Sumeet Khanna doubts the bailout will help small business owners like himself.

“Just upping the federal depository insurance is really not going to solve anything,” said apa owner Khanna. “It may plug a whole, it may put a Band-Aid on something, but that’s not going to return jobs to people, that’s not going to put money in people’s pockets.”

The Chairman of Fremont Bank, Alan Hyman, said he believed the FDIC increase will be “somewhat” helpful to his bank’s clients, who he said generally are weathering the financial crisis.

“Subjectively, I think Fremont has been resilient to the economic turndown,” he said. “Surely there has been some drop in some home prices, but it will make it through the crisis.”

Hyman said that most of Fremont Bank’s customers do not have deposit account balances over $100,000; however, he said that “in terms of dollar amounts” the accounts with balances over $100,000 are sizable. Nonetheless, Hyman said he does not think the insurance increases are going to make a “major impact.”

Joe Ching, chief executive officer of Pan Pacific Bank, a community bank in Fremont serving commercial clients, said he does not support the increase in FDIC coverage.

“It’s too cosmetic for me,” he said. “It could get into the hands of abusers and could cause us problems down the road.”

Ching said while he does have customers with balances over $100,000, he agreed that the insurance increase will not benefit his customers.

“I’m not for FDIC insurance at all,” said Ching. “It’s meaningless to me.” Ching and Hyman both stressed that community banking is about trust and personal relationships with the leaders of the bank, who are rooted in the community.

“Go with a responsible bank,” Ching said. “That’s where you put your money. Get to know your bank and your bankers real well and see if they have something between their ears.”

Spa owner Khanna said his businesses uses Fremont Bank, which is headquartered across the street from his spa’s location in The Hub, for convenience and personal connection to the bank.

“They just support you a little more. In terms of a big, national bank, you’re just a number to them,” Khanna said. “With us, we have direct contact with the bank right across the street. That works for us.”

Fremont residents and small businesses who have accounts in local credit unions will also receive an automatic increase in federal insurance up to $250,000 per account. Like the FDIC coverage for banks, the National Credit Union Administration (NCUA) provides similar insurance on credit union accounts.

However, accounts in credit unions are less exposed to the crisis than many traditional bank accounts, according to Emily Condon, vice president of marketing and retail delivery for Alliance, a San Jose-based credit union with a branch at Fremont’s Hub. Condon said credit unions are typically “over-insured” compared to banks since NCUA is well funded.

“For every $1.00 at a credit union, there is a $1.24 in the NCUA fund,” she said.

Additionally, credit unions have “more conservative” lending practices overall, and therefore are less exposed to the mortgage meltdown, she said. Even before the bailout, Alliance purchased insurance to cover an additional $250,000 above the NCUA coverage for each account. With the bailout, Alliance’s deposits are insured up to $500,000 each.

Condon said Alliance’s Fremont branch, like their other locations, seems to be doing fine.

“The Bay Area as a whole has a lot of money,” she said.

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