Bank failures rise in the recession
In the wake of the 2008 financial meltdown, bank failures have become an all-too-common part of American life. According to the Federal Deposit Insurance Corp., 140 banks went under in 2009. The industry eclipsed that mark in 2010; 157 banks went under.
For consumers, it’s only natural to wonder about the health of their bank. But how do you determine if your bank is at risk? The short answer is: you don’t.
“Gauging a bank’s vitality is really hard. It’s something a lot of experts grapple with,” says Harlan Platt, a Northeastern University finance professor. “But that doesn’t mean your money is at risk.”
In fact, it’s easy for consumers to make sure they have zero exposure should their bank fail. And for those who want to do a little extra homework, there are other ways to minimize the effects of their bank failing.
Is your bank an FDIC member?
Hands down, the most important thing you can do to mitigate the risk of your bank going under is to ensure it’s a member of the FDIC, says Marcy Schwab, vice president of retail banking at Sallie Mae, the student lending firm based in Newark, Del.
“Let’s put it this way, when IndyMac failed (in 2008), the customers got their money back because it was insured,” she says.
Chances are, most banks you encounter will be FDIC members, and they’ll likely display that membership with FDIC seals throughout the bank. But to be safe, it’s a good idea to check with the FDIC website.
As a general rule, each depositor is insured for up to $250,000 per bank. If you have more money to deposit, it’s a good idea to diversify and find an additional bank.
Check your bank’s ratings
Private ratings services like Bankrate’s Safe & Sound, BauerFinancial and LACE Financial (now part of Kroll Bond Ratings) are good resources for gauging a bank’s health. But while their ratings might look different, they’re all based on the same data reported to the FDIC, says Gene Kirsch, a senior banking analyst with Weiss Ratings in Jupiter, Fla.
The data reflect the strength of the bank’s capitalization, its asset quality, profitability, liquidity (the bank’s ability to raise cash) and stability (strength over multiple quarters).
“You shouldn’t see wildly different results, but it’s certainly possible for a bank to receive a ‘B’ rating from one agency and get an ‘A’ from another, because we all use different economic models that weigh risk differently,” says Kirsch. “The best advice is to use multiple ratings, but only after you’ve vetted several banks for issues like FDIC membership, convenience, fees, etc.”
The price for accessing ratings can spike into the hundreds of dollars. But basic grades, which provide little analysis, are often free, and they’re usually enough for most consumers. “It only makes sense to pay if you’re an investor or if you’re using the bank for your small business,” says Kirsch.
Tap SEC filings
You can access a bank’s financial filings online at the Securities and Exchange Commission’s website, and you can also get a lot of the financial basics through Google Finance.
“The good news is that there’s a lot of information out there,” says Platt. “Unfortunately, very little of that information is going to be useful in terms of gauging the health of your bank, because the bad news usually comes out after the event.”
If you have a sophisticated background in finance or accounting and have the time, Platt says it might be worthwhile to pick apart the balance sheet for clues. But according to Platt, a better option for most consumers is to look at the executive compensation.
“Banks all make their money in pretty much the same way,” he says. “When you see salaries that are way out of line, that’s a good indication that the management team might not have the right long-term priorities.”
Another quick indicator is owner equity as a percentage of total liabilities. “The greater the percentage, the better,” says Platt, “because it means that they’ve made money and been stable over the long run.”
Check with bank regulators
There are a number of bank regulators out there, so it’s wise to start with a visit to the FDIC website to see which regulator has authority over your bank. While many of those regulators publish regulatory orders and other documents specific to a given bank, reading them won’t be much help in terms of determining the vitality of the bank, says Platt.
“The regulatory orders are really just boilerplate and not very useful to consumers,” says Platt. “Regulators have an idea of the banks that are at risk, but that information is kept very private. If it got out, it would cause a run on the bank and sink the institution.”
Unfortunately, new financial regulations don’t give concerned consumers any more tools to assess information on troubled banks. But Platt says the key point to remember is that consumers can avoid hardships associated with bank failures simply by keeping their accounts under the FDIC threshold and spreading their money over several institutions if they have holdings in excess of $250,000.
Look at your bank’s fees and charges
While it’s important to check on your bank’s health, if only because that knowledge may give you some peace of mind in a tough and uncertain economy, it’s also important to keep track of the big picture.
“For most consumers, the FDIC covers issues that can go wrong with a bank,” says Schwab. “So a really important place to focus your energy and attention is on the value you’re getting from your bank. Are the fees too high? Are there overdraft charges? Is the ATM network convenient? How’s the customer service, etc.?”
Fortunately, it’s easier to answer these questions than it is to discern whether a bank is financially sound, and consumers need only check their statements regularly to stay informed and keep their bank accountable.