It’s going to happen one day, sooner or later. Stock investments will take a hit and nervous investors will scurry back to the safe haven of FDIC-insured bank CDs.
Yet, not everyone has been paying attention to bank safety for the past several years. The industry’s problems of the late 1980s have been forgotten.
Back then, one bank in 120 and one thrift in 200 were going down the tubes. Today the failure rates are as low as one in 3,000, and nearly 9 of every 10 institutions are deemed supersafe.
That’s no reason to be complacent, insists Warren Heller, research director of Veribanc Inc., in Wakefield, Mass., a well-known independent company that rates the strength and safety of all banks, savings and loans, credit unions and bank holding companies. It analyzes 25,000 outfits in all, probably including the place you now keep your money.
“Today, so few institutions are having difficulties, those that are in trouble often can hide in anonymity,” explains Heller.
FDIC insurance protects your accounts up to $100,000 per person at the same institution–including principal and interest. But that doesn’t mean you won’t run into “technical” difficulties if you do business with a weak outfit, adds Heller.
“A bank that’s close to being `on the rocks’ may pare its services to the bone, make errors on your account, be difficult to deal with or fire its nicest people. If you’re having a hard time getting a loan, it may not be your bottom line that’s having problems. It could be the bank’s.”
Sound familiar?
There have been horror stories about consumers getting tangled in FDIC bureaucracy when they tried to retrieve their insured money after an institution failed. A 91-year-old man once waited 18 months for his cash. Reason: His signature didn’t match the one he used decades earlier when he was 38.
“The system works well,” says Heller, “but why take chances? You don’t buy insurance when you have faulty brakes on your car, or leave loose wires lying around the house, do you? The business of banks is handling money. So why shouldn’t you know how good they are at it before you hand over yours?”
Time was when FDIC seizures of failed banks knocked some customers’ CD yields for a loop because, in that circumstance, the takeover institution had the right to reduce the yield to a lowly passbook rate–or to no interest rate at all.
Today the continuing rash of bank mergers poses a different problem: Say you have a $50,000 CD in one bank and a $60,000 account at another outfit. The two banks merge. Technically, you’re $10,000 over the $100,000 limit, but by law you have six months to pare the total to within the limit, or until the first maturity date of either CD.
Because of earlier banking crises, the rules have become stricter, says Heller. “The FDIC is now required by law to solve banking problems with the least cost to the government, even if it means you lose money in the process.”
The current picture, though, is far from grim. Only 77 banks are on the FDIC’s “problem list,” or less than 1 percent of all banks. Hence, there have been no bank or S&L failures thus far in 1997, while only two credit unions have gone belly-up. By comparison, six years ago a total of 281 institutions went under.
Using the banks’ own financial data, which they must file with federal regulators, Veribanc checks them for asset quality, capital strength, earnings, liquidity and 20 other criteria. To keep things simple, it assigns easy-to-understand safety codes for each outfit:
– A “color code”–green for a strong bank, yellow for one you should approach with caution, red for “better check this one out carefully.” The colors tell the bank’s recent financial condition.
– A “star-rating” system, with three stars being tops. These indicate where Veribanc thinks the institution’s safety is headed.
– A “blue ribbon” list–the creme de la creme of the safest banks–that now make up about 32 percent of all institutions. In contrast, only 0.1 percent are in the “red” zone with no “stars.”
Heller’s track record has been better than decent. More than 99 percent of the bank failures over the past two years were in Veribanc’s “red, with no stars” group. You can get an instant rating of any one bank, S&L or credit union by phone for $10, and $5 for the second, by calling the company at 800-442-2657.
– Latest rate trend: Long-term CD yields resumed their decline, but mortgage rates bumped up slightly.
– Credit card tip: Considering a card with a rebate or reward? It’s best to get points, miles or cash based on purchases, which you pay off monthly, rather than on an outstanding balance.
