When a series of banks> started failing last year, federal officials said consumers money was safe and guaranteed, as long as their financial institution was insured by the Federal Deposit Insurance Corporation (FDIC).
Now, it s becoming clear that the FDIC has its limits. According to an Aug. 23 report by Richard Bove, the vice president of equity research at Rochdale Securities, another 150 to 200 banks may fail in the aftermath of the credit crunch yet, and if they do, the FDIC could need more money to secure consumer deposits.
The FDIC s Deposit Insurance Fund is now at its lowest point since March 2003, down to around $10 billion in June 2009 from more than $40 billion in June 2008, according to Bove. As that reserve has dwindled, the number of troubled banks has climbed to 250, and 81 have failed so far this year. During the 12 months prior to March 31, 44 banks failed and cost the Deposit Insurance Fund an estimated $20.1 billion, according to the FDIC. At the end of the first quarter of this year, the FDIC had $13 billion in its fund, and its reserve ratio (the balance of the fund divided by insured deposits) stood at 0.27%, its lowest point since 1993.
Regardless of the fund s level and the stunning speed of its decline, all sources interviewed for this article said that the government plans to do everything in its power to keep it from running dry. As the fund loses money from bank failures, the FDIC replenishes it by charging its member banks a special assessment fee, which is essentially an insurance premium. Riskier institutions have to pay more, based on a risk assessment that includes supervisory issues, leverage ratios and loans that are past due, says Andrew Gray, a spokesman for the FDIC.
After everything that went on in the past year that fund got somewhat depleted so the FDIC felt it was prudent to increase the premiums, says Carol Kaplan, a spokeseoman for the American Bankers Association, an industry trade group.
The assessment fee for all insured banks went from $1 billion in December to $2.6 billion in March, according to Bove. He projects additional special assessment fees in the fourth quarter of this year and the second quarter of next year to build up the FDIC s reserves. In addition, the FDIC has also been granted a $100 billion line of credit with the U.S. Treasury.
Here s what consumers need to know.
What does FDIC insurance cover?
Concerned consumers should confirm that accounts at their bank are FDIC-insured. That way, even if the bank fails, you won t lose your money.
Use the online estimator tool at MyFDICinsurance.gov or call 1-877-ASK-FDIC.
In 2008, the FDIC increased the amount of money it insures per individual per bank from $100,000 to $250,000 until Dec. 31, 2013. That means that account holders can have up to $250,000 insured in a checking or savings account, certificate of deposit or money-market account, collectively in one bank. In addition, you can have a joint account with a spouse for up to $250,000.
If you have more than $250,000 in deposits, consider signing up for a Certificate of Deposit Account Registry Service (CDARS), a program in which you can deposit more than the insured limit with one participating bank, says Jim Chessen, the chief economist at the American Bankers Association. Your bank will swap the amount in excess of $250,000 to another bank so that you maintain full FDIC protection on your investment. The money is at multiple banks, but you sign one agreement with the participating bank of your choice, earn one interest rate on all your accounts, and receive a regular statement. To locate a bank that offers this program in your region, click here.
How do the special assessment fees that banks incur affect the consumer?
Banks are likely to increase their interest rates or fees on their loans or lower their interest rates on their depository accounts, says Linda Sherry, a spokeswoman at Consumer Action, national nonprofit consumer education and advocacy organization.
If they don t, it would go against all the experience we ve ever seen with banks, she says. They pass along increased costs to consumers. If they have enough customers at their banks these are likely to be smallish increases in fees that consumers experience.
Fees could also result in a larger minimum required payment on loans, fees to get an extra copy of your statement or higher overdraft fees, she says.
Still, paying a few pennies more or even a dollar more in fees on average is a small price to pay to have your money insured for up to $250,000, Sherry says.
Can I research my bank s health?
Consumers who want to check up on their bank s health have several options. With publicly-traded banks look at their Securities and Exchange Commission (SEC) filings; you can look up their financial status at sec.gov or on the bank s web site, where they often include their own financial information. It s harder to track privately-held banks, but consumers are within their rights to ask bank representatives for copies of balance sheets and other financial paperwork, Sherry says.
In addition, Bankrate.com offers free ratings reports on a bank s health based on its profitability, liquidity, asset quality and capital. With a state-chartered bank, consumers can call their state banking authority to find out about the institution s safety and soundness.
What happens when a bank closes?
The FDIC keeps very close tabs on banks, says Kaplan.
Banks are required by law to submit certain financial information in a monthly call report, she says, which is like a balance sheet of assets, liabilities and outstanding loans. When the FDIC pinpoints an unhealthy bank, it s added to the troubled-bank list.
Some banks on that list eventually fail, and the government typically decides to shut them down. This decision usually goes into effect on a Friday afternoon; by that time, the government should have a good idea of what bank will take over the failed institution. If a buyer can t be found, the regulator will act as a temporary custodian while its assets are sold and the money is returned to consumers before it s dissolved.
The FDIC does everything in its power to get that bank taken over by larger institution, Sherry says. They don t want the bank to just go away; they want it to be merged into another institution and for business to go on as usual.
According to Bove s report: The difficulty at the moment is finding enough healthy banks to buy the failing banks. This is not a problem in the case of the smallest failed institutions but it is a problem in the case of the larger institutions. Big American banks are showing no real desire to bid for the failed banks. Thus, the FDIC is looking for buyers overseas and among private equity funds.
What happens to your money when your bank fails?
Regardless of what happens when an FDIC-insured bank fails, in most cases, you can still make ATM withdrawals and maintain immediate access to your money.
The FDIC normally makes account holders funds available instantly, but in some cases it might take two or three days, Kaplan says. As more small banks fail, Kaplan doesn t anticipate that this period will be extended.
If the bank isn t acquired by another institution, the regulator typically sends out the account holder s money by check, says Greg McBride, a senior financial analyst at Bankrate.com.
Could the FDIC ever fail?
FDIC insurance is the underpinning of the entire banking system, McBride says.
The money is backed by the full force of the U.S. government. It would have to be a catastrophic event of proportions that we ve never seen for that to even become an issue, Kaplan says. I couldn t imagine something like that happening. The backing of the U.S. government is pretty much as good as it gets, she says.