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How safe is your money?

Thursday, July 31, 2008

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In the chaotic aftermath of the recent bank failures, sorting through the facts and deciding whether to be worried about the growing bank failures can prove to be an impossible task.

Uncertainty is never a positive thing, especially when it comes to your investments. The country has been hearing an array of bad news lately concerning the impending doom of the banking system. The collapse of IndyMac officially as of July 11 has been the fifth FDIC insured bank to be seized this year. Two of which were located in the neighboring state of Missouri -- Douglass National Bank was seized in January with over $58 million of assets and Hume Bank was seized with over $18 million.

Analysts in USA Today and National Public Radio said that profits of federally insured banks and thrifts have plunged to a 26-year low due to institutions setting aside record-high amounts in order to make up for losses caused by faulty mortgages. Finance Week, a nationally acclaimed financial analyst publication, reported that as many as 300 banks could fail over the next three years following the closings of IndyMac. The FDIC has announced plans to rehire 25 retired employees who had previously worked in a division of the company specializing in handling bank seizures in response to the anticipated increase in bank failures, according to USA Today.

Although the media seem to be planning for a mass collapse of the banking system much like that in the 1980s and early 1990s, the FDIC has only listed 90 banks as "problem institutions" and said that historically, only 13 percent of that list typically fails. The question investors and depositors want to know is, "Will that 13 percent be me and what will I loose if it is?"

In the 1980s and early 1990s, over 2,000 banking companies failed as a result of reasons including a decline in the housing market, much like the real estate crisis today. According to the FDIC, the majority of those affected received reimbursement and generally open access to their existing funds, but cost the American taxpayers around $124 billion.

Corresponding issues have led to similar outcomes from the market of today and the 1980s and 1990s but the FDIC has attempted to explain what happened to IndyMac and why this time it will most likely be a concentrated occurrence.

Banks close when they are in danger of running out of cash to meet their financial obligations, and banks like IndyMac, who gave out risky mortgages and loans with few stipulations for who could receive them, are just now displaying the loss they experienced due to faulty financial standards. IndyMac's problems did not stop there. By the time it was seized on July 11, withdrawals added up to more than $1.3 million in just 11 days. Shortly preceding their seizure, IndyMac had fired half of their workforce and halted most mortgage lending.

History, and basic mathematics, shows that banks ultimately close when investors and depositors fear for their money and take part in mass withdrawals. A phenomenon the FDIC has called "depositor runs."

In fact, the FDIC was founded in 1933 after the Great Depression in order to halt mass withdrawals and in return, save the entire banking infrastructure from collapsing.

"Congress created (the FDIC) in 1933 to restore public confidence in the nation's banking system," the FDIC Web site statement reads.

Before the FDIC was founded, depositors would collect around 50 to 60 percent of their funds but only after several years. Today, a new system known as the insured deposit transfer (IDT) allows insured funds to be transferred to a healthy financial institution directly after seizure, so depositors can have virtually uninterrupted access to their funds.

The FDIC insures the nation's 8,494 banks and savings assets and guarantees returns on a growing variety of accounts.

Up to $100,000 of a general checking or savings account at an insured bank is guaranteed to the depositor in the event of a bank seizure, including CDs, according to the FDIC Web site. Retirement funds such as IRAs are covered an additional $250,000 in accordance with a new legislation passed by Congress, and all loans, home or otherwise, will remain the same. Some investors and depositors can receive more than the $100,000 if they have joint accounts or speak with an FDIC representative to determine whether funds qualify for separate deposit coverage.

More than 200,000 IndyMac customers have complete access to their money according to FDIC chairman Sheila Bair in an interview with National Public Radio.

"The chance that your own bank will be taken over by the FDIC is extremely remote. And if it does happen, you will continue to have virtually uninterrupted access to your insured deposits," Bair said in an attempt to relieve bank anxieties.

The consensus seems to be that staying calm despite the media frenzy and uncertainty displayed by financial analysts can help local banks avoid a seizure that could cost some depositors and investors thousands.

Bank customers should check to see if their financial institutions are FDIC insured by calling toll free at 877-275-3342 or look for FDIC signs at your financial institution and while doing so, verify that particular investments are insured as well.

To see how your bank rates on the financial scale, and learn how to keep more cash by learning FDIC rules, visit www.baueerfinancial.com/btc_ratings.asp



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