Paying the piper

Nearly every West Virginian is still feeling the effects of last year’s financial meltdown.

Yet, West Virginia didn’t cause it.

It was caused in large part by a burst in the housing bubble. Home buyers with adjustable rate mortgages could not make their payments when interest rates shot up. Banks and other lending institutions were stuck with so-called toxic mortgages. Those losses reduced the capital base of those institutions.

As a result, some of those banks failed.

But that didn’t happen in West Virginia, where banks played by the rules and didn’t engage in a high-risk lending game.

It happened in Florida, Georgia, California and elsewhere.

Yet, West Virginia banks are paying a price.

The Federal Deposit Insurance Corp.’s plan to replenish its insurance fund to cover losses at failed banks is going to cost FDIC-insured institutions in West Virginia more than $166 million.

That’s money the institutions will not have available for loans and other money-making investments. They must send the money to the FDIC by Dec. 30.

The FDIC protects deposits in insured institutions up to $250,000.

To their credit, West Virginia banking officials prefer this payment plan as opposed to the FDIC borrowing the money from a taxpayer-funded credit line at the U.S. Treasury. But they’re not exactly thrilled about it, either.

“Unfortunately, the money that leaves the state can’t go out in loans or economic development,” West Virginia Banking Commissioner Sally Cline said.

Pioneer Community Bank, based in southern West Virginia, will send the FDIC about $600,000.

“If you invested that amount over three years in a callable bond, you would be lucky to get 2 percent interest,” said James Sizemore, president and CEO of Pioneer Community Bank and chairman-elect of the West Virginia Bankers Association.

“That’s not a big number, but it is 2 percent you could have had. If you had the money out in loans, you could have maybe tripled that. You are taking that earning asset out of your bank.”

The good news is that West Virginia’s banks are in solid financial condition and can afford to make the payments to the FDIC, but it clearly impacts the ability of these local banks to lend and do their own investing.

It’s not that these banks won’t be able to provide loans to, say, companies that are looking to expand and create jobs, or other borrowers who have the means to repay them. It just makes it somewhat harder on West Virginia banks that have managed their operations responsibly.

They have to participate in this “penalty,” if you will, because of the big picture.

It’s a shame, perhaps wrong, that the hit has to be taken by those who don’t deserve to take it.

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