Is My Bank Going to Fail? BBB Answers Questions and Puts Fears to Rest

October 15, 2008

 According to the Federal Deposit Insurance Corporation (FDIC), the independent agency that insures bank deposits, IndyMac Bank was the third-largest financial institution to fail in U.S. history. In the wake of IndyMac’s demise, two more banks in Nevada and California were recently taken over by the FDIC. With nearly 100 banks on the FDIC watch-list, fears have been sparked in many consumers, leading them to wonder if their bank is next. To help put bank customers at ease, Better Business Bureau is providing answers to frequently asked questions about the role of the FDIC and the potential threat of additional bank failures in the U.S.

“A bank failure, like that recently seen with IndyMac, has a devastating impact on the public’s trust in the economy,” said Steve Cox, BBB spokesperson. “It’s important for consumers to understand how secure their money actually is due to the insurance provided by the FDIC.”

Following are answers from BBB to frequently asked questions regarding bank failure and the role of the FDIC:

What is the FDIC?
The FDIC was created by the Glass-Steagall Act of 1933 in response to the thousands of bank failures that occurred during the Great Depression. The FDIC provides “insurance” coverage for consumer bank deposits in case of a bank failure.

Why did the FDIC step in and take over IndyMac Bank?
The failure of IndyMac was largely due the bank’s continued practice of not fully documenting the earnings and assets of borrowers before granting mortgages. As the real estate market began to decline, IndyMac suffered serious losses - $709 million in the last two quarters of 2007. IndyMac’s customers began to worry the bank might fail and, in late June, withdrew $1.3 billion in 11 days. Fearing a bank run, Federal regulators transferred control of the bank to the FDIC.

Is my bank at risk?
The FDIC has created an undisclosed list of troubled banks that are at risk of failure.  The list was built with some reliance on the “Texas Ratio,” a formula that compares a bank’s assets and reserves to its non-performing loans. Banks with a ratio over 100 percent are considered the most at risk for failure. Considering there are more than 8,500 banks in the U.S., and only about one percent have made the troubled list, the FDIC is advising consumers to not worry about the security of their bank.

How much of my money is insured by the FDIC?
The FDIC covers savings, checking, and money market accounts, as well as certificates of deposit (CDs). For single accounts, a depositor’s money is insured for up to $100,000. If, however, the single account holder also has a joint account at the bank, that account is insured for up to $200,000. Some retirement accounts, such as traditional or Roth IRAs are insured for up to $250,000.

What isn’t insured by the FDIC?
The FDIC does not insure investments such as stocks, bonds, or mutual funds, nor does it cover U.S. Treasury bills, bonds or notes. Insurance and annuities are also not covered.

What if I have more money in my bank than what is insured?
Several thousand IndyMac Bank customers found out the hard way that they had more money deposited in the bank than was insured. Luckily, in the case of IndyMac, the FDIC has agreed to pay customers 50 percent of the value of their uninsured deposits.

What will happen if more banks fail?
Experts estimate that the failure of IndyMac will cost the FDIC from $4 to $8 billion. The Treasury Secretary, Henry Paulson, has stated that other bank failures will likely follow, but added that the FDIC is prepared and has more than $53 billion in reserves to cover insured deposits. 

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