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Evaluating Bank Safety

EEE1
EEE1   |     |   2 posts since 2018

Hi.

I'm looking for the best means to evaluate bank safety ahead of another financial crisis along the lines of what happened 10 years ago. (For the sake of argument, let's assume this happens sometime in 2019; I'm looking to discus what defensive measures to take with CDs, savings, and MMAs.)

I'd like to put my money in a safe bank, but determining safety is proving tricky. I like the health reports available on this site; it's very useful, but I'd like to dig further.

The Texas Ratio looks at today's non-current loans. What happens, though, if it turns out that a large % of loans rapidly become non-current, for instance if ARM rates jump suddenly and catch a number of homeowners unprepared?

I'd like to see what kind of investments a bank lends to, in broad terms. For instance, what % goes into RE loans? Of those, how many are for primary residences vs. investment properties? How many are standard 15/30 yr fixed, and how many are ARMs or subprime? What metric would be good to use and is readily available to the general public?

I find the recent higher rates attractive but I want to weight those against the relative risk of the bank defaulting or failing.

Thanks in advance! This is a great site.



Answers
QED
QED   |     |   34 posts since 2013
If you believe the USA is already circling the drain and headed ever more downward in very short order, say by next year, then while I respect your view I do not agree. I do not foresee collapse of our country in the near term.

That established, your only concern regarding bank or CU failure would be absolutely to be certain you invest entirely within the constraints of the FDIC and/or NCUA guidelines. Because unless the USA itself fails, you will be fine at any American bank or CU.

I myself have always tried to find banks and credit unions on the brink of failure in which to place my money. It's because such "teetering on the edge" institutions pay higher rates of interest. And if they DO turn turtle, the FDIC or the NCUA can be relied upon to bail depositors out. It has happened to me three or four times at least. There was never a problem.
Test3
Test3   |     |   6 posts since 2018
Do you remember how fast the FDIC acted to give your money back?
alan1
alan1   |     |   287 posts since 2015
My one experience where the FDIC shut down a bank and mailed out checks (as opposed to closing the bank and having another institution take over the accounts) is that the bank was closed on a Friday. Checks were mailed on Monday.

Since the FDIC is utilizing the bank's records, it takes longer for owners of brokered CDs to get their money.

I don't know how long it takes if deposit insurance is increased by having multiple co-owners and/or beneficiaries. It seems to me that the insurer would need to determine if co-owners and/or beneficiaries had kicked the bucket before the death of the bank.
QED
QED   |     |   34 posts since 2013
All of my experiences are akin to alan1's single experience. It was FASSSST! However, I concede the following:

I was within guidelines and I had no complicating aspects to my accounts which might otherwise have required passage of time to research.

There was one time when I was (technically) outside the guidelines. This was due solely to accrued interest in the account at the time the bank folded. So my accrued interest alone put me over the FDIC max. I received my insured principal balance back from the FDIC so fast it made my head spin. And of course that was the overwhelming majority of my money.

But the FDIC did not stop there. They kept sending me checks, over time, even for the (supposedly) uninsured accrued interest in my account. In the end I think my loss came to six bucks . . or whatever. I mean, it was a great experience. That account had been paying me interest for quite a while at a rate FAR above what I could have received elsewhere. I came out WAY ahead.  Would do it again in a heartbeat.
ConfedrcyDunces
ConfedrcyDunces   |     |   116 posts since 2016
Bank assets were sold, and you received partial repayment as unsecured creditor.
Test3
Test3   |     |   6 posts since 2018
Thanks to both alan1 and QED for the thorough responses!
EEE1
EEE1   |     |   2 posts since 2018
An additional comment:
In a recent interview, Harry Dent said he's taken his money out of banks entirely and put them into a brokerage account. I'm not sure I'd go that far, but his reasons were interesting. Even the safest bank he'd found invested heavily in real estate, and with a housing crash coming (in his analysis) there would be many bank failures. (Many bank account holders don't realize that the money in the account is technically not theirs, but are loans to the bank.)

Brokerage accounts, in contrast, don't lend money for real estate, period.

So that's one point of view: banks are more at risk today than brokerage accounts.
ConfedrcyDunces
ConfedrcyDunces   |     |   116 posts since 2016
Harvey Dent is a cartoon character.

Of course brokerages invest in real estate. In all sorts of things.

The thing is, when you have money in a brokerage account, it is not being loaned to the brokerage. It is generally in what is called a money market fund.

And it is true, money market funds do not invest directly invest in real estate. They invest in other fixed income securities.

So, that is one difference between bank accounts and money market funds. Another is that only one is guaranteed by the Treasury.


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