Tuesday, June 17, 2008
Make sure your bank is safe
|The financial industry has been turned upside-down from the turbulence created by the credit and mortgage crisis. The shock waves are affecting our small, independent, community banks in rural America as well as the large, national banks with household names. To give you some perspective of how the financial climate has changed, there were only three FDIC-insured bank failures from 2005 to 2007. Now, we are witnessing our fourth FDIC-insured bank failure and we are only halfway through 2008. A recent article in the Wall Street Journal chronicles the SWAT team-like closure of First Integrity Bank in Staples, Minnesota. The operation had the FDIC operating covertly under a fictitious company name to quickly cleanup the bank’s failure in one, swift weekend. While citizens of Staples were kept clueless and unaware for as long as possible, to prevent any panic.
A small town in Minnesota may seem miles away from the sunny atmosphere in Orange County but the winds of this financial storm are still blowing. One should not get too distracted by the gas price to forget the importance of protecting ourselves from becoming a casualty of an unforeseen bank failure. As a 4th generation banker, I am painfully aware of the economic failures that have occurred and want you to understand the importance of checking the barometer of your financial institution. When choosing or reviewing your bank, here are some key things to keep in mind:
• Take a look at the financial statement on the FDIC’s web site. It provides the amount of classified loans and amount of capital held by the bank. Classified loans denote substandard loans or worse. You want to see a 9% or greater ratio derived from the amount capital divided by the total assets.
• You can also compare the total loans to total deposits. A ratio greater the 80% may be an indicator that the bank is an aggressive lender. Which means you should assess how conservative the bank is in making their loans. A red flag should go up for banks that specialized in development loans for single family housing over the past five years.
• If your deposits exceed $100,000 and/or you have large lines of credit for your day-to-day business operation, have a back-up plan for having access to both. A bank failure could stop your business or life in its tracks.
• Don’t expect a brokerage firm to be a better alternative to a bank relationship. I have consulted more than one friend who found the term liquidity in liquid investments does not always mean getting your funds tomorrow or even the next week.
So…do a little research and collect some true independent data to determine if your money, savings, and lines of credit are truly safe, sound, and secure with the financial institution you trust.
(Note: According to the Wall Street Journal article, some analysts are predicting even more bank failures, up to 150, within the next three years. Even the most cautious people can get caught in the middle of failed bank situations.)