Is It Safe?

Should you keep your money in an FDIC insured problem bank? Or are you asking for trouble?

As of the latest report released by the FDIC there were 416 problem banks at June 30, 2009, up from 117 the previous year and up from 305 on March 31, 2009.   Total assets held by the troubled institutions is $299.8  billion.

Although no insured depositor has yet lost a penny in FDIC insured banks, it is asking for trouble to keep your money in a Problem Bank.  Here are a few potential problems that can occur if your bank goes under.

  • When a bank is closed by the regulators, depositors may be subject to losses if any portion of their savings is not insured by the FDIC.   See Is My Cash Safe In The Bank? to determine if your savings are fully covered by FDIC insurance.
  • If the FDIC cannot find another bank to acquire a failed bank’s deposits, the failed bank is shut down by the FDIC under the category of “Payout”.  The FDIC will then mail out checks for insured deposits, but depositors are  subject to delays in receiving their money.  This exact situation occurred when Platinum Bank was closed on September 4th.  The FDIC will not mail out checks to  insured depositors until September 8th.   The result is that depositors of Platinum Bank do not having access to their money for a week or more before actually receiving and cashing the FDIC payout check.
  • The ultimate risk of keeping funds in a problem bank is the occurrence of a totally unexpected  “Black Swan” economic  catastrophe, which could result in sudden large scale bank failures and public panic.  In such a scenario, the weakest banks would be the first to go under and access to deposits could be restricted for long periods of time.  The FDIC insurance fund, besides being nearly depleted,  was never designed to deal with large scale systemic bank failures.  In a total banking meltdown (as we almost had last year) the government and the FDIC would be overwhelmed.  How close the world came to large scale bank closings during the height of the banking crisis of 2008 was recently revealed in an expose by The Guardian:

“Britain was within hours of a banking shutdown last autumn as the government battled to piece together a rescue plan for the stricken Halifax and Royal Bank of Scotland, it has emerged.

Treasury mandarins and Bank of England officials battled the clock to come up with a support package on the weekend of 12 October. If they had failed, the Financial Services Authority could have ordered the closure of cash machines and prevented deposits at either of the two main casualties of the global financial chaos.

In the absence of a deal, the FSA would have issued notices to the two banks forbidding them from taking deposits or allowing withdrawals.”

How To Identify A Problem Bank

The FDIC does not release the names of the banks on the Problem Bank List but it does release the names of banks that are the subject of serious regulatory sanctions.  See FDIC Issues Cease And Desist Orders To 20 Problem Banks – Why Are These Banks Still Open? According to the FDIC, a cease and desist order “may be issued when a banking organization or institution-affiliated party is engaging, has engaged or is about to engage in an unsafe or unsound banking practice, or a violation of law.”   Banks that are subject to cease and desist orders or other enforcement decisions and orders are typically in very weak financial condition and prone to failure.

You can find out if your banking institution is subject to Enforcement Decisions and Orders by clicking on this FDIC link.

Another easy way to initially assess your bank’s financial condition would be to  view the Problem Bank List at www.calculatedriskblog.com. which can be accessed at this link for The Problem Bank List.

Comments

  1. Educated Banker says:

    Keep in mind that the FDIC does not publish newly issued C&Ds; they generally only become public about a week before the final action date (generally 30 or 60 days after issuance). Colonial Bank, which failed last month, chose to make thier C&D public, not the FDIC. So, your bank could be under a C&D, and you may not find out until just before they fail. The OTS on the other hand, does make it’s enforcement actions public when issued.

  2. Mae Herman says:

    If a bank is a sub S corp what happens to the shareholders stock if the bank fails?Thanks Mae

  3. Problem Bank List Staff says:

    The shareholders of the sub S would then own stock that is in all probability worthless.
    Under Federal law any allowed claims against the failed bank would be paid in the following order of priority.

    Depositors
    General Unsecured Creditors
    Subordinated Debt
    Stockholders

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