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Defend yourself against a failing bank

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As the FDIC mops up the mess that was once IndyMac Bank, consumers are left with unpleasant images of long lines of worried customers waiting to get their uninsured deposits back. It’s a tumultuous time for the financial industry. The crisis is running the gamut from investment banks such as Bear Stearns to government-sponsored enterprises — such as Fannie Mae and Freddie Mac — and, of course, to institutions like Wachovia, Washington Mutual, National City, which have been in the news for needing capital, and however many community banks are in trouble.

“There’s a crisis of confidence,” says Les Satlow, portfolio manager at Cabot Money management in Salem, Mass. “IndyMac telegraphed that it was going to be in deep trouble, but when confidence finally buckled it was the final nail in IndyMac’s coffin. From the way management talks about what’s going on at banks, it’s very clear that their first priority is to maintain confidence as they don’t have a run — and that applies to consumer and investment banks.”

Which is why Washington Mutual and National City recently released statements regarding their capitalization and liquidity, with National City going so far as to say it was responding to market rumors and that the bank was not experiencing unusual depositor or creditor activity.

“People grossly overreacted to IndyMac Bank,” says Bert Ely, banking industry consultant and president of Alexandria, Va.-based Ely & Company.

“IndyMac was an outlier. We knew it was going to fail. But the lineup of people after the FDIC took over ghastly overstated conditions in the banking industry that led to the panicky reaction. Earnings figures for the second quarter aren’t the greatest, but they’re not the gloom and doom people had been foreseeing. It’ll be a slow, bloody recovery from the credit correction, which was overdue and much needed. But a lot of people tend to equate a bank reporting a loss with a bank failure. That’s why banks have capital — it’s a cushion to get through a period of losses. IndyMac didn’t have enough capital.”

The watch list

The FDIC says 90 banks are currently on its “watch list,” but that isn’t to say the agency is aware of all of the banks that are in trouble. There’s still room for commercial and residential real estate to deteriorate and that could cripple some institutions. But, to be clear, being on the watch list doesn’t mean a bank will fail; the agency says historically about 13 percent of banks on the list fail.

“Consumers need to be smart about where their deposits are in this environment,” says Satlow. “Banks are in a much weaker financial condition than they’ve been in for many years. (Stay within) FDIC limits and be smart about how you structure your accounts. The other lesson that’s important is that there’s a reason why certain banks will offer higher yields than others. Cast a wary eye on yields that are noticeably outside the pack. If a bank is offering 50 or 100 basis points above the pack, you need to know why. How can they afford to pay 100 basis points more than another bank and why would they?”

Satlow says a higher yield isn’t always a sign of a bank in critical financial condition and, in fact, online banks have what he calls a natural overhand advantage in this area. But he advises consumers to be wary and make sure all deposits are insured.

U.S. Bank failures 2007 to 2008


Closing date


IndyMac Bank, Pasadena, Calif. July 11, 2008
First Integrity Bank, NA, Staples, Minn. May 30, 2008
ANB Financial, NA, Bentonville, Ariz. May 9, 2008
Hume Bank, Hume, Mo. Mar. 7, 2008
Douglass National Bank, Kansas City, Mo. Jan. 25, 2008
Miami Valley Bank, Lakeview, Ohio Oct. 4, 2007
NetBank, Alpharetta, Ga. Sept. 28, 2007
Metropolitan Savings Bank, Pittsburgh Feb. 2, 2007

What happens after a failure

To be sure, the highly publicized mess outside IndyMac after the failure was announced showed that the ensuing process doesn’t always go as smoothly as officials would like. Typically, the bank’s regulator announces the closing and appoints the FDIC as receiver.

The FDIC goes on scene and, usually, shuts the bank on a Friday and reopens it by the following Monday. Even in times such as this, it hasn’t been difficult to find buyers to take over most institutions since they’re often only taking the insured deposits. (For more specific information on what happens after a bank failure, read a Q&A with the FDIC’s David Barr.)

“The FDIC can carve out all the problem loans and other assets of the bank and just pass a clean institution to the acquiring bank,” says FDIC’s Barr. “Even if all they want are the branches, then they just take the insured deposits and they get an instant bank. Many times they’ll take the front-line employees too.

“We try to market the liabilities as quickly as possible. The FDIC is not a financial institution; we’re a liquidator. If they are marketable loans that could easily be sold on the secondary market, we’ll try to sell those. If they’re troubled loans, then we work with the customers to get them to perform.

“The good news for the taxpayer is that this costs them nothing since the FDIC is funded by charging banks premiums for deposit insurance. Now, if we run out of money, then the full faith and credit of the United States stands behind our insurance fund. Luckily, the FDIC hasn’t had to go there, but if you remember back in the 1980s, the insurance fund for (savings and loan associations) actually went out of business and it cost the taxpayers $150 billion.”

While insured deposits are covered 100 percent in the event a bank fails, Barr says that over the past 15 years uninsured depositors have received an average of 72 cents on the dollar for the portion of their funds that exceeded the insurance limit. There have been instances where uninsured depositors received 100 percent of their money, but others have received much less, as was the case with the Oakwood Deposit Bank in Ohio in 2002, where uninsured depositors received just 42 percent. While you may recover your uninsured deposits, it can take a long time, even years. On the other hand, insured deposits are paid very quickly, usually within 48 hours.

There are several ways to insure more than $100,000 at a single bank. Read “Are your deposits insured?” for tips on making the most of FDIC coverage.