If you keep under the standard deposit insurance limit, you should not have to worry about losing your money if your federally insured bank or credit union fails. So why should depositors who keep under this limit care about the financial health of their banks? There are in fact several reasons, and I describe these reasons in this post.
The next question is how to determine the financial condition of your bank? There are a few resources on the web that can help you determine this. I've reviewed some of the best and provided their strengths and weaknesses.
Why You Should Care?
For those who keep under the standard deposit insurance limit (currently $250K until 12/31/2013), it might seem like the financial health of your bank is of no concern. It is true that you don't have to worry about losing any of your principal and accrued interest up to the day of the closure. For most of the recent bank closures, the FDIC has made the transition process very easy for depositors. Often a new bank assumes all deposits, and most everything will stay the same. However, there have been some issues that have caused problems for depositors.
I first described reasons why you should care about the financial health in a previous post, and readers contributed some additional ones. Below is a new list that includes readers' contributions:
- 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 in 2009 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.
- If you have a checking account at a failed bank and there are no acquirers, and the FDIC does a pay-out of your insured deposit balance, your outstanding checks to vendors will all be returned. Most vendors will assume it's due to NSF, when in reality the checks will be stamped "Bank Closed". Many vendors will then attempt to charge you NSF fees due to their lack of knowledge or experience with this situation.
- Brokered CDs of a failed bank can take three or more weeks before funds reach your brokerage account. No interest is earned during this period. In addition, it's common for brokered deposits not to be assumed by the acquiring bank so payouts by the FDIC are more likely.
- 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.
- 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.
Finding the Financial Health of Your Bank
The most accurate list that shows how close your bank is to failure isn't public. The FDIC maintains a secret "Problem List" of banks. They keep the list secret since disclosure would hurt the banks on the list. Each quarter the FDIC issues its report on the banking industry and provides general information about this list such as the total number of banks on the list and the total combined assets of these banks. In February 23, 2010 the list included 702 banks and $402.8 billion in total assets. The NCUA has a similar process and list for credit unions.
At the same time the FDIC publishes its quarterly reports, it also updates its database with the latest financial data from the banks. This process usually takes just under two months. For example, on February 23, 2010 the FDIC publicly released financial data that was dated December 31, 2009. Once this data is public, several private ratings services process this data and formulate ratings based on their own criteria. This process adds yet another delay with most services taking 1 to 2 months to update their ratings.
This delay is one important issue to consider when reviewing bank ratings. As you can see above, bank ratings may be based on financial data that is up to 7 months old.
Some of the services claim to also update their ratings based on current events. An important event that can give clues about the health of a bank is from enforcement actions issued by government regulators. These can be orders for the bank to correct unsafe and unsound banking practices. Like the financial data, there is some lag time between when an enforcement action is issued and when it's made public. In addition, some enforcement actions are not made public. Sometimes banks will be the first to disclose an enforcement action. This is typically done by banks that are part of a public company. Publicly traded companies are required to report certain material corporate events with the SEC, and these reports are made public.
Deciding which ratings service is the best based on the details of the analysis that they do is difficult. Thus, I did not attempt to make that determination. Each service provides some explanations on their ratings methodology. Feel free to leave a comment if you have opinions on this. The strengths and weaknesses that I list below involve more basic issues.
Financial Strength Ratings Databases
- DepositAccounts.com Health Scores and Texas Ratios - Update 9/2/10 - Pros: 1) includes credit unions, 2) Fast to update on new FDIC data (days), 3) Free and detailed analysis reports
- BauerFinanical Star Ratings - Pros: 1) Includes credit unions, 2) Fast to update on new FDIC data (under 1 month) / Cons: 1) analysis reports are not free
- Bankrate.com's Safe & Sound Star Ratings - Pros: 1) Includes credit unions, 2) Free analysis reports 3) Detailed analysis reports / Cons: 1) Slow to update on new FDIC data (~2 months)
- TheStreet.com Ratings - Pros: 1) Free analysis reports / Cons: 1) No credit unions, 2) Slow to update on new FDIC data (1-2 months), 3) Short analysis reports
- BankFox HEALTH Report - Pros: 1) Free analysis reports, 2) Detailed analysis reports / Cons: 1) No credit unions, 2) Slow to update (over 1 month)
- MSNBC BankTracker Troubled Asset Ratio - Pros: 1) Includes credit unions, 2) Fast to update on new FDIC data (under 1 month), 3) Free analysis reports / Cons: 1) Short analysis reports
Useful Unofficial Lists of Problem Banks
- Calculated Risk Unofficial Problem Bank List (Scroll down weekly summary for the link to the latest list) This list includes banks that have received enforcement actions by regulators. Credit unions are not included.
- Map & Table of Texas Ratio, Non-Performing Assets, and Total Capital for Banks (As of March 18, 2010) The list does not include Savings and Loan Associations, Credit Unions, or Thrifts.
If you have other recommendations of ratings services or opinions on the criteria they use, please leave a comment.