There is little doubt more savings and loan institutions will fail before the situation turns around. While the government pumps more of your tax dollars into troubled thrifts, the question you need to think about is: "What happens if my S&L goes under?"
Why do they fail? While dishonesty was certainly a factor in the thrift crisis, most institutions fail because the money they earn on their assets (such as the mortgages they issue) does not cover what they must pay on their liabilities (the CDs and passbook accounts belonging to depositors). The imbalance worsens when borrowers default on their loans or when the value of real estate declines. Income slows, but thrifts still must pay out the promised interest rate to depositors.
Many thrifts have taken prudent steps to protect themselves against downturns, and once you have determined their financial condition you can have confidence in them. These healthy thrifts and banks often are the ones who step in to acquire the assets of a weaker thrift when the government decides it should be closed. If there is no acquirer, the government must pay off all the depositors and close it down.
That's where "government assistance" comes in. There is a misperception that when failing thrifts are sold to other institutions or wealthy individuals (as they were in 1988), billions of dollars of government assistance goes to the new owners. Not so. The buyers receive none of this money; in fact, they usually must add significant amounts of their own capital.
That's good news. It means even if your thrift should fail, be taken over by the government or acquired by another institution or individual, your deposits will be protected. But there are other matters you should be aware of:
* Unless you request the financial statements, or read them in your newspaper, you may not know your thrift is in trouble. If you don't like surprises, it's worth checking from time to time how your financial institution is doing.
* You may not know who's buying your institution from the government until the transfer occurs. Except for a few well-publicized situations, the new owners generally will not notify you until the government announces the change in ownership. In fact, the new owner may not know that its bid for the failing institution has been accepted until a few days before the changeover. You can be confident, however, that the new owner -- whoever it is -- will be one with sufficient capital to support the acquisition.
* Your branch location won't change, but the name of the institution might. If another institution takes over your thrift it may put its name on the door in a matter of days. Your account won't change, but if computer systems aren't compatible you may not be able to bank at the new owner's other branches until a computer conversion occurs.
* You're protected even if the acquisition results in your balance exceeding $100,000. If you have an account in the institution doing the acquiring as well as the one being acquired that could take you over the $100,000 mark, don't worry. You will be insured for the entire balance for six months or until the maturity of the acquired account -- whichever is longer.
* Your savings rate may change. Weak institutions tend to pay high rates to attract the cash they need to survive. The new owners may want to pay a lower market rate. If there is a change, it won't occur for at least 14 days following the acquisition, and the institution must issue a notice at least seven days before any rate change.
Industry consolidation is likely to continue in the months ahead. If your thrift is affected, it should be comforting to you as a depositor to know that there will be little disruption. Your money will be insured to the maximum legal amount, and any acquirer of your account is probably a healthy, well-managed institution.