Insights & Advice


Are Your Bank Deposits Safe?

As a result of the turmoil in the banking sector, I have been fielding quite a few questions about the safety of local banks. The answer to the above question is yes; your bank deposits are absolutely safe—as long as the total amount of money in your name is no more than $100,000 per bank deposit. In addition to cash, the Federal Deposit Insurance Corporation (FDIC) covers up to $250,000 in tax-deferred deposits, such as IRAs, pension and profit-sharing plans. Beyond that, many banks take out private insurance to entice deep pocket customers with more than $100,000 to bank at their place.

Anyone who can read or listen knows by now that the global banking sector is ailing. That’s a given. Yet, most readers think of Citibank, HSBC or Bank of America when they think “banks” but there are plenty of regional and local financial institutions in this country and that’s where you and I place most of our money. So far 26 of those banks have failed this year (according to the FDIC’s website).
The last one happened September 5 in Nevada. Another less than two week’s ago, Integrity Bank of Alpharetta, Ga. Integrity, like many local banks, was a real estate lender to commercial builders. Real estate lending for many banks, especially in rural areas, is an engine of growth since there are fewer business borrowers available.

The list of troubled banks is growing. Regulators are working overtime to monitor the situation with most of their attention focused on Rust Belt states like Michigan and Ohio and those hardest hit by the housing crisis like California, Florida and Georgia.

There are now 117 banks on the FDIC credit watch list up from 76 in March. To give this number some perspective, I remember back in 1982, during the S&L crisis there were upwards of 200 institutions that went belly up. In 1989, a total of 206 banks failed which was the worst number since the Great Depression. In each case, the FDIC handled the crisis with backing from the Treasury. Today the FDIC has over $45 billion in cash backstopped again by the government (read, we, the taxpayer) and given that the FDIC insures over 8,000 institutions, 26 failed banks are a drop in the bucket. So why worry?

Monday, a little known Kansas-based insurance company, Kansas Bankers Surety Co., said it had decided to stop selling private bank deposit insurance above the amount guaranteed by the FDIC to its banking customers. It also plans to cancel existing customer policies in the next few months. The company is owned by none other than Warren Buffet, one of the savviest investors in today’s markets. It is one of only a handful of companies that offer this type of insurance. It is rumored that Buffet himself ordered the move, although that was neither confirmed nor denied by the company. The question is whether other companies will follow suit. Why, you might ask, should that be important?

One reason would be the already existing high percentage of uninsured deposits in our nation’s banks– about 37%, according to an article in the Wall Street Journal. We’re talking a lot of money since the writer estimated that there was $7.07 trillion in bank deposits in the U.S. as of the first quarter of 2008. After yesterday, I suspect that percentage will be moving higher.

For the little guy with deposits below the FDIC insurance limits there is little to worry about short of a massive financial collapse. However, for those of us fortunate enough to have more money, I would suggest you take a hard look at your banks. Unfortunately, the FDIC list is not available to the public. But Standard & Poor’s is a good place to start. It is one of several credit agencies that rank the credit worthiness of banks. Check for recent downgrades. If you can, find out if your bank is either losing money or charging off large volumes of loans or both. In the event you discover that your money may not be protected as well as it might, there are plenty of non-banking institutions that do carry huge amounts of insurance specifically for people like yourself. Please refer to my August column on the subject “How safe is your Brokerage Account” or contact me for more information.

Posted in Macroeconomics, The Retired Advisor