Aug 29th, 2008
How Safe is Your Bank?
It’s one of the biggest questions on the minds of folks with an account at a bank or credit union–which is just about everyone in the United States. How safe is my bank?
It’s a question that isn’t all that easy to answer. Many people consider the size of the bank when thinking about safety; after all, it’s easy to believe that a bank with huge buildings and tons of branches (as well as billions of dollars in deposits) is really safe. To that, there’s two words that serve as a counter argument: Bear Stearns (of course, Bear Stearns is an investment bank, which is not your typical everyday bank).
So how do you know your bank is safe? While there’s no absolute way to be sure, here’s some ideas:
1) Make sure your bank is FDIC (or credit union is NCUA) insured
While the Federal Deposit Insurance Corporation has a list of “problem banks”, that list is not made public. However, we know a bit about that list, including the number of banks on the list, which is 117 and appears to be growing.
However, none of that matters if your bank is not FDIC insured! You can find out if it is by using the FDIC.gov Web site. You can do the same for credit unions with the roughly equivalent National Credit Union Administration Web site, NCUA.gov.
2) Understand what FDIC and NCUA insurance actually covers
Just because your institution is insured, it doesn’t mean your accounts are, or the things in them. There are many types of uninsured products that can be had at insured institutions, such as stocks, bonds, mutual funds, money market funds, U.S. government backed investments, insurance products, and safe deposit box contents. Some of these have other forms of insurance (such as the U.S. government backed investments); some are just not insured. Also be aware of the $100,000 limit on your insurance coverage at an institution. While there are ways around this, I am of the opinion it’s best to simply have accounts at different institutions.
3) If your bank is publicly traded, check its stock price and performance
This can give you a pretty decent idea of how your bank is faring. For instance, over the past year Wells Fargo (WFC) and J.P. Morgan Chase (JPM) have had their stock price underperform the major indices, but not by a lot; on the other hand, many other banks including some large ones (which I won’t mention so as to start a rumor they may be in trouble) are performing considerably worse than the indicies, one down about five times what the Dow Jones Industrial Average is in one year performance. This doesn’t tell everything, but at least you know how it’s held up versus other banks.
4) Get a ranking
Bankrate.com and AMBest.com have various ways they rate banks through their Web sites. This may well be worth taking a look at.
Those are some ideas to see if your bank is safe; they’re not infallible (Indymac, for example, wasn’t on the list of banks that the FDIC considered to be at risk), but they can tell you something. Take reasonable steps to make sure your money is safe even if your bank isn’t necessarily so (like keeping your deposits well within the insurance limits). When Netbank was taken over by the FDIC and eventually had its accounts sent to ING Direct, I didn’t lose a cent, which is exactly what the insurance can do for a consumer. Be smart and be safe!
