FDIC Protects Most, but Not All, Bank Assets

DON'T YOU HATE IT when you head to the ATM at your local bank only to find a padlock on the front door and a line of anxious depositors stretched around the block? We sure do.

People banking with IndyMac, the West Coast lender that became the fifth bank to fail this year (see chart below), know the feeling all too well. The last thing anyone wants is to become an unwitting participant is some grim re-enactment of a scene from the Great Depression.

It's hard not to wonder whether your bank could be next. Ladenburg Thalmann analyst Richard Bove fueled those fears in a recent research report that tried to figure out which institutions are most vulnerable. While the report wasn't released to the public, it's been widely reported that regional-bank names like Downey Financial (DSL) and Corus Bankshares (CORS) made Bove's list, as did giant Washington Mutual (WM). No wonder investors and depositors are freaking out.

Bove limited his analysis to institutions backed by the Federal Deposit Insurance Corp., which as of the end of the first quarter had 90 banks on its own "Problem List." The good news: That's just 1% of all the banks insured by the FDIC. The bad news: The number has grown for six consecutive quarters. (The FDIC doesn't publicly identify the banks.)

The FDIC is every depositor's friend, and it's what will keep almost all of us from ever joining the bank-failure soup line. The agency insures principal and interest on insured accounts — including checking, savings and CDs — up to at least $100,000, with some entitlements and accounts covered for more. IRA funds are insured up to $250,000. Stocks, bonds, mutual funds, life insurance and a bunch of other products aren't insured, however, even if you bought them through an FDIC-insured bank.

The bottom line: If your insured deposits are covered, you're fine. To make certain you have nothing to worry about with the money at all your institutions, use the FDIC's Electronic Deposit Insurance Estimator.

If everything is insured, you shouldn't really notice any difference in your banking. Even when a bank fails and falls under the agency's control, it typically closes on a Friday and reopens Monday. Depositors have access to their insured deposits via checks and debit cards as usual. A fully insured depositor who is totally out of touch might not ever know there'd been a ruckus at the bank.

The key, of course, is to be fully insured. If you have a tidy nest egg, think about spreading your wealth around a number of FDIC-insured institutions. To ensure a bank is insured — as well as review its hopefully uncheckered past — go to the FDIC's web site. You can also call toll-free at 1-877-275-3342.

To assess your current or new bank's financial strength and stability, use Bankrate.com's Safe & Sound tool, which employs 22 tests to rank institutions. That should help you spread your insured wealth around banks, thrifts and credit unions that are unlikely to implode.

When the subprime disaster brings down an institution of IndyMac's size, it's only natural to have "The Grapes of Wrath" in our nightmares. After all, it was the second-largest bank to fail in U.S. history — and no one knows who could be next. So maximize your FDIC coverage among lots of solid banks and perhaps, just perhaps, you'll sleep better at night.

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