Bank Rating Update and Why You Should Care

As I was checking the ratings of yesterday's failed banks, I noticed that BauerFinancial has updated its bank ratings with financial data that the FDIC released on February 23. If you do a search at BauerFinancial, it will say "based on December 31, 2009 financial data." It had been based on 9/30/09 data. The data has also been updated for credit unions.

Some recent bank and credit union failures had high ratings, and this may be due to the ratings being based on financial data that is over 4 months old. An example of this happened yesterday with the credit union that was liquidated. Bankrate's rating, based on 9/30/09 data, was 4 stars (sound) and BauerFinancial's rating, based on 12/31/09 data, was 0 stars (lowest).

Now we'll have to wait on Bankrate.com to update its database. When the FDIC released its third quarter data on November 24, Bankrate didn't update its database until around January 20 (almost two months.) So we may not see new Bankrate ratings until late April.

If you keep under $250K, should you care about bank ratings?

The FDIC and NCUA have demonstrated that they pay all insured deposits up through the day of the closure. This includes both the principal and accrued interest. So if you keep under the insurance limit (the standard limit is $250K until 12/31/2013), you don't have to worry about losing your money. However, there are at least three reasons why depositors should care about the health of their bank or credit union even if they keep under the insurance limit:

1. If a bank fails and the FDIC can't find a buyer, it'll send depositors checks for the insured principal and accrued interest. This takes at least a week. You'll lose at least a week of interest during this time, and there's the worry of it being lost in the mail. One reader who had deposits at Community Bank of Nevada when it failed last year waited several weeks before he received the money. The FDIC had the wrong address, and he had to spend quite a bit of time on the phone with the FDIC for this to be resolved. Another reader reported having a 10-day hold when he deposited the FDIC check at his bank.
2. When a bank fails, it's common that existing CDs will either be closed or the rate will be lowered (if another bank assumes the deposits). Principal and accrued interest may be safe, but a high interest rate is not safe. Depositors are free to make penalty-free early withdrawals, but they may have trouble finding CDs paying anywhere near the rates that the old CDs were paying. This has been very common in today's low-interest rate environment.
3. FDIC now has rate caps for less than well capitalized banks. This isn't an issue for fixed-rate CDs, but it has been an issue with high-yield reward checking accounts. There have been cases in which banks had to significantly lower their reward checking rates in order to meet the FDIC rate cap for interest checking.

Can you think of other reasons to care about the health of a bank or credit union?