Bank Safety: Is My Bank Safe?

A simple, three-step plan to protect your money from the next bank failure.

By Horatio Whistleblower

With the recent bank failure and FDIC takeover of IndyMac, 'Is my bank safe?' is the big question for the rest of 2008. The IndyMac failure was the fifth bank failure so far in 2008, following only three failures in 2007, and no failures in 2006. But, boy IndyMac was a doozy... the third largest bank failure in history at $32 billion in assets! 

Bank safety in now a bigger issue as FDIC predicted failures begin rearing their ugly heads. There were numerous articles in February of this year discussing the build-up of employees at the FDIC as they geared up for coming bank failures, and it looks like they were right. There are now 90 banks on their "problem banks list" which, historically, is not a huge number. But times are different now. Esoteric investments like derivatives and huge losses in the mortgage market are taking their toll at the expense of the average depositor.

What can you do to find out more about bank safety? How can you know for sure if your bank is safe?

You would think that the FDIC might be helpful in answering whether your bank is safe or not, but they never release ratings on the safety and soundness of banks and thrift institutions to the public (They don't want to cause a run on the bank, you see). Having no access to the FDIC problem banks list, how can the average bank customer know where they stand? The fact that IndyMac apparently wasn't even on the list of FDIC problem banks makes that question even harder to answer.

The FDIC does provide some help, however. On their website they provide links and short descriptions of most of the companies that offer bank rating services to the public. On their list you'll find everything from Bankrate.com's free service to quarterly products that cost close to $600 per quarter.

My personal favorite is http://www.veribanc.com who, for $10, will give you instant ratings over the phone, followed up with written confirmation. Any additional ratings are only $5 each.

Here are three simple steps you can take right now to make sure you're not the next victim of a bank failure.

Step 1) Determine your total deposits in banks. Is there more than $100,000 in any one bank? If so, immediately remove enough money to get your total deposits BELOW $100,000.

Step 2) Review the safety of any banks holding your deposits by using one or more of the bank rating services listed on the FDIC website.

Step 3) Determine exactly where banks fit in to your overall financial plan. Are bank instruments like CDs and money market accounts your primary investments? If so, you may want to incorporate a "Deposit Placement Agreement" in order to get extra bank FDIC coverage. Are banks a place to hold the liquid portion of your portfolio? Or do you use banks primarily as a way to pay bills with your checking account? Normally this step -- determining he role banks play in your overall plan -- should happen first, but I've found that few people have a comprehensive, coordinated financial plan, often even well into retirement.

There is absolutely no substitute for a well-crafted, solid financial plan. Having a solid financial plan in place eliminates potential problems from your future before they happen. By knowing the "worst case scenario" -- like bank failures -- and protecting against that, a solid financial plan eliminates as many risks as possible, and clearly identifies the risks that can't be eliminated so they can't sneak up on you... like IndyMac snuck up on the FDIC.   

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