Picking up Nickels

Saturday, September 27, 2008

How the U.S. Government can help banks raise capital

With a $700 billion financial bailout plan currently being hammered out in Washington, I've been thinking about other ways that banks could tap into new sources of capital. I have an idea that some may find outlandish (if not downright Un-American), but what if financial institutions and the U.S. Federal Government actually encouraged U.S. citizens to save? I realize that this is a novel concept, but please bear with me for a moment.

What if a bank in need of capital could quickly attract a huge amount of deposits from people like you and me by offering something like FDIC-insured five year certificates of deposit (CDs) with market-leading rates? Goldman Sachs was willing to offer Warren Buffet a sweetheart deal for preferred stock with a 10% dividend in exchange for a $5 billion infusion. So why not offer attractive deals like this to anyone with some available cash they're looking to put to work?

A bank in need of cash could do something like the following:

  • Offer a 5 year FDIC-insured CD at 7% APY. Make it attractive for the customer to leave their cash in this CD for the entire term by imposing an early withdrawal penalty equal to one year of interest.
  • Control costs by offering incentives like a 25 basis point rate increase for customers that fund these CDs electronically and/or online.
  • Advertise the hell out of this deal in television, print, and online media.
  • Offer this promotion with a fixed end date to encourage prompt investment.

Further, the Federal Government could assist by making savings more tax-favorable:

  • Create a provision for a Roth-like savings account (RSA), where all interest income is tax free. Anyone eligible to open an account at a U.S. bank could contribute up to a maximum of $10,000 per calendar year to a RSA regardless of income. The funds in an RSA could be withdrawn by an individual without penalty at any time for any purpose.
  • Give interest from non-RSA savings the same tax treatment as dividend payments to the shareholders of a company, capping the tax at the 15 percent rate for most individual taxpayers instead of treating it as regular income.


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