The global financial crisis of 2008 has prompted many to take a second look at the health of their financial institutions. Many banks and credit unions may not be as financially healthy as you might think. So far this year, the FDIC has closed more than 80 banks, and there are more than 700 banks on the FDIC watch list. The NCUA, which is associated with credit unions, maintains a similar watch list, and there are more than 350 credit unions on that list.
If you are not concerned about the financial health of your bank or credit union, you should be. Many folks assume that because their accounts are protected by the FDIC or NCUA, there is nothing to worry about – even if the financial institution fails. For now (and until the end of 2013, unless the limit is raised permanently), accounts are protected for amounts up to $250,000. Those who have less than that amount in their accounts assume that there is no reason to worry about a bank’s health, since they will get their money. However, there are a number of inconveniences associated with having your money in a failed bank:
- Difficulty getting your money: If a bank (or credit union) is found to take over running the failed bank, then the transition is often smooth. However, if the FDIC or NCUA does not have another institution lined up, you will have to wait for a check. Any number of complications can arise that can make it difficult to obtain your money in a timely manner.
- Fees and hassles: If a bank is closed, un-cleared transactions are sent back. This can result in fees, interruption in service and other problems. You might eventually have the fees refunded to you, but the time lost can’t be recovered. Nor can the difficulty of having direct deposits and automatically withdrawals changed without prior notice.
- Lost interest: Since you do not have access to your money, it is no longer working for you. You lose interest on money that you are waiting for. You can’t use that money for your benefit, and your CDs might see lower interest going forward.
Knowing the health of your bank can help you make informed decisions that are best for you before you are forced to change banks by a failure. You should evaluate the health of your bank or credit union now, and then decide whether or not it makes sense to move your money elsewhere if you are concerned about a bank failure. Keeping control of your money, and retaining access, is vital for those who are savvy when it comes to making their money work for them.
Learning About Your Bank’s Health
In order to prevent panic among customers and protect banks, the watch lists issued by the FDIC and the NCUA are secret. However, lists that include financial information about institutions are publicly available every fiscal quarter. It is then possible to use different formulas to determine the financial health of banks.
Deposit Accounts offers its own look at the financial health of banks and credit unions in the U.S. You can look up individual financial institutions and read about different factors contributing to the health of the bank. Some of the factors that can help you get a picture of your bank’s health include:
Developed at RBC Capital Markets, this is a relatively simple way to determine the overall credit troubles experienced by financial institutions. It is determined by comparing the total value of the funds available to the bank with the total value of at risk loans. The total value of funds available is decided by adding the loan loss reserves and the tangible common equity capital a bank (or credit union) has. In order to determine the at risk loans, the Texas ratio adds real estate owned and non-performing loans together. At risk loans that are backed by the government are filtered out.
The risky loans divided by what’s available can be expressed as a percentage. For example, KeyBank currently has $64.42 million in at risk loans, and only $56.12 million on hand to cover the possible deficiency. If you take 64.42/56.12, you get 1.1478. Multiply by 100 and you get a percentage: 114.8%. Anything approaching 100% and heading higher is considered poor. The closer you get to 100%, the greater risk. Bank of Hawaii, on the other hand, has $57.52 million in risks versus $989.15 million in positive assets, resulting in a Texas ratio of closer to 5.81%, which is quite good.
The Texas ratio is a quick way to tell, at a glance, the kind of credit risks your financial institution might be subject to. There is also a Texas ratio trend you can use. Check to see if your financial institution’s Texas ratio is rising or falling. If the ratio is moving higher, closer to 100%, that could be an indication that the situation is worsening for your bank or credit union.
Another consideration is deposit growth. When people put money in a bank, it is an indicator of confidence. It also increases the money that a bank has on hand, and can help strengthen the balance sheet of the bank. You can look to see the amount of total deposits that a bank has, and look to see whether they have been increasing over time. If a bank or credit union is seeing a drop in total deposits, it might be an indicator that failure is on the way, since it will no longer have the ability to keep a strong balance sheet.
Another quick, at-a-glance indicator of bank financial health is its available capital. You can figure available capital with a straight up of measure an institution’s assets minus its liabilities. Stronger capital means that there are more assets available to cover potential losses.
You can also use market share data to help you determine the health of your bank. The FDIC offers information on market share on banks. Find out whether your bank has been growing relative to others, as well as view information on deposits and other information. There is a lag, so you might be dealing with older information, but it can still give you a solid idea of market share.
A careful survey of your financial institution can help you determine the health of your bank or credit union . Once you have the information about your bank, it is possible to make a more informed decision about the best place for your money.