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Breaking the Bank: How Safe Are Your Savings?

  • Austin Pryor Sound Mind Investing
  • 2008 10 Oct
  • COMMENTS
Breaking the Bank: How Safe Are Your Savings?


In almost any good-sized city, many of the largest buildings are likely to be bank buildings. An impressive edifice sends an important message to customers: "Our bank is solid and successful. We're here to last."

Bankers know that customer confidence is one of the keys to a bank's health. If confidence were to waver, a bank could go into a financial tailspin.

Since the collapse of IndyMac Bancorp and several other banks this summer (all overwhelmed by problem loans), the banking industry has been on edge.

The state of nervousness has been heightened by prognostications from some noted economists, such as Nouriel Roubini of New York University, that a "systemic banking crisis" is beginning to unfold. In August, Roubini predicted in Barron's that mounting loan losses (related to mortgage defaults and unrecoverable consumer debt) could lead to the failure of hundreds of financial institutions — not unlike what occurred in the late 1980s and early 1990s.

To shore up customer confidence (and to ease shareholder concerns), Bob Steel, the new president and CEO at banking giant Wachovia, wrote a letter to the bank's "clients and friends" filled with reassuring words such as "solid," "strong," "resilient," and "trust."

The American Bankers Association — the banking industry's trade group — issued a list of "talking points" to member banks, emphasizing that banks are "well-positioned to handle economic downturns" and that "customers' deposits are protected."

So, if bankers are feeling nervous, should you be, too? The answer is both yes and no. A "systemic banking crisis," if it comes, won't be pretty (remember the S&L meltdown?). Still, it is unlikely, even if your bank were to fail, that you would lose a penny — unless you have a great deal of money in that one bank.

Most bank deposits are insured through the Federal Deposit Insurance Corporation (FDIC), a federal agency that covers each depositor up to $100,000. (Important: It's $100,000 per depositor, not $100,000 per account.) Joint accounts are covered up to $200,000. Retirement accounts have an insurance limit of $250,000. In some states, deposits may have additional state coverage.

Today, when a bank fails, it usually reopens — with new owners and under the close supervision of federal banking officials — within just a few days. Behind-the-scenes arrangements between the purchasing bank and the FDIC allow the "new" bank to have ample cash on hand for frightened customers who may want to move their money elsewhere.

But even with the relatively smooth business transition that occurs after present-day bank failures, it's simply not wise, given deposit insurance limits, to have more than $100,000 in any single bank.

To spread your risk, you can simply move a portion of your savings (anything over the insurance limit) to another insured bank. The accounts will be insured separately, so even in the unlikely event that both banks were to fail, you wouldn't lose any funds.

For CD accounts, you can get additional protection by signing up for the Certificate of Deposit Account Registry Service (CDARS), which makes it possible to have your CDs insured up to a limit of $50 million! Here's how: Banks in the CDARS network split large CD deposits into smaller chunks, which are then spread among other member banks, so that the amount in any given bank is below the FDIC limit.

Some online brokers are now adapting the CDARS model to cash accounts, giving customers a way to "spread the risk" without having to open multiple accounts. A client's cash deposits with a broker are split into smaller amounts and simply re-deposited in multiple banks, thus raising the effective limit of FDIC insurance. One such broker, FOLIOfn, promises "extended FDIC coverage" of $2.3 million.

Of course, you may not need millions in coverage. But given the current struggles in the banking industry, it's worth adding up how much you actually do have in any single bank, and, if necessary, taking steps to protect it.

A little attention now can insure that you'll never have to stand outside that impressive bank building in a long line of worried depositors, wondering if all your funds were insured.

© Sound Mind Investing

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