Citigroup Warns Customers It May Refuse To Allow Withdrawals
February 24th, 2010Via: Business Insider:
The image of banks locking their doors to keep customers from making withdrawals during a bank run is what immediately came to mind when we heard that Citigroup was telling customers it has the right to prevent any withdrawals from checking accounts for seven days.
“Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change,” Citigroup said on statements received by customers all over the country.
What’s going on? It seems that this is something of an error. The seven day notice policy only applies to customers in Texas, Ira Stoll reports at The Future of Capitalism. It was accidentally included on customer statements nationwide.
“Whatever the explanation, it doesn’t exactly inspire confidence in Citi,” Stoll writes. “But it’s hard to believe a bank would be sending out a notice like that on its statements.”
UPDATE: According to Stoll, Citi issued a statement saying that it has been required to make this change by Federal regulations–and it no longer sounds like it’s limited to Texas:
Update: Citibank has now released the following statement by way of explanation: “When Citibank moved to unlimited FDIC coverage in 2009, we had to reclassify many checking accounts to allow for immediate withdrawals in order to ensure all customers qualified for the additional coverage. When we moved back to standard FDIC coverage with most major banks in 2010, Citibank decided to reclassify those accounts back to make them eligible again for promotional incentives. To do so, Federal Reserve Reg D requires these accounts, called NOW accounts, to reserve the right to require a 7-day notice of withdrawal. We recently communicated this technical requirement to our customers. However, we have never exercised this right and have no plans to do so in the future.”
I’m a bit puzzled by this. If I got a message like that from my bank, my first reaction would be to empty my account immediately.
If not sure what they were hoping to achieve.
“While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change”
Does this mean that they’re hedging their bets? As in, now that they’ve notified their customers, they can employ this rule at any time in the future without further warning?
Ever since the bank runs in 2008 there has been unease over the fears of massive customer withdrawls. I would suppose that the Huffpo campaign to starve the big banks of their deposits might have exacerbated those fears, more recently.
Because of the “Fractional Reserve” nature of our banking system, $1 in withdrawn bank deposits can leave the bank somewhere in the neighborhood of $9 short of sufficient cash.
Stopping depositors from withdrawing money is the generally accepted stopgap measure of preventing a bank “run” from turning into a full scale collapse.
After turning away customers who are demanding withdrawls, the bank calculates how much cash they will need and gets a loan of actual hard currency (well, assuming fiat currency is “hard”) from the FED. They then literally truck the cash in and allow the customers to make the withdrawl, albeit a few days later than the depositor might have liked.
So, what they’re hoping to achieve is the prevention of complaints that depositors weren’t warned that they couldn’t get their money.
And you’re right when you suspect that they’ll implement this new policy without any further warning, when it suits them to do so.
In the past couple of weeks, I’ve had friends who complained they were told by their banks that checks deposited wouldn’t be available for 7 days, despite the fact that checks clear in 24 hours nowadays. I wonder what relation that may have to this new Federally mandated policy.
Perhaps they are exercising it a bit at a few banks, just to get people used to the idea.