Keeping Your Money Safe

PERSONAL FINANCE

First step should be to make sure that every account is insured

August 03, 2008|By EILEEN AMBROSE

Three bank failures in three weeks. More are expected this year. Could your institution be next?

Not likely. Most banks and credit unions are financially sound. And given the improvements to deposit insurance, Marylanders won't have to relive the panic of the 1980s when the Old Court Savings & Loan failed and took with it the state's private deposit insurance system.

Still, the recent headlines and the run on IndyMac Bank - which last month became the third-largest bank failure in U.S. history - don't inspire much confidence. Consumers are obviously concerned, as evidenced by the recent near-run on Eastern Savings Bank of Hunt Valley over an erroneous television report.

The Federal Deposit Insurance Corp., which insures deposits, says its site received more than 9 million hits a day in the week after IndyMac's failure, more than 10 times the usual number. People searched for updates on IndyMac, reviewed their bank's financial figures and checked their deposit insurance coverage. So how do you know if your institution is on safe or shaky ground?

It's not that easy.

"The regulators don't always know which banks are in trouble," says banking consultant Bert Ely. IndyMac, for instance, wasn't put on the FDIC's secret list of problem banks until June.

Indeed, it's more important to make sure your deposits are fully insured, so you're guaranteed to get your money back if your bank goes bust, than to try to figure out whether the bank is in trouble.

Nevertheless, here are some resources to use on both counts:

*FDIC's Web site: The FDIC publishes financial information reported by lenders quarterly and other historical information at www.fdic.gov under "Bank Find." The National Credit Union Administration publishes similar data on credit unions at www.ncua.gov.

If you like numbers, you'll find plenty of them on the FDIC site. But, frankly, they may mean little to you. Some, like assets and net income, are easy to understand. But there are many less familiar terms, such as tier 1 capital, total risk weighted assets and volatile liabilities, which just sounds dangerous.

A bank analyst can put these figures into perspective. Thankfully, you don't have to be one. Some research companies do the job for you. And they post their ratings of banks and credit unions online for free.

*Rating services: Bankrate.com offers a Safe & Sound rating on banks, thrifts and credit unions. The company says it uses 22 tests to measure an institution's capital adequacy, asset quality, profitability and liquidity. Institutions also are evaluated against their peers.

Institutions receive a rating of one to five stars. The more stars the better. Bankrate also posts a report explaining its findings.

"Most institutions fall in the middle. The only real concern is if you are in the lower end, two or one stars," says Greg McBride, senior financial analyst with Bankrate.

Even then, he adds, you don't have to worry if your deposits are fully insured. "That's still not enough to make some people feel at ease," McBride adds. You must decide for yourself if you're comfortable sticking with a low-rated institution, he says.

BauerFinancial also uses a five-star rating system. Two stars or less "indicate the bank is facing some challenges," says Karen Dorway, Bauer's president. Just under 300 banks have two stars or less. That doesn't mean they'll all fail, she says, adding only seven banks have gone under this year.

TheStreet.com Ratings gives banks and thrifts a letter grade from E for "very weak" to A for "excellent." IndyMac, for instance, was downgraded in June from D- to E-, or "very weak financial strength." The brief report said that even in favorable economic times, "it is our opinion that depositors or creditors could incur significant risks."

Most institutions rate a B or C. "People tend to think that a C is bad. C is fair. And fair is pretty good," says Philip van Doorn, senior banking analyst. Be concerned if a lender rates a grade below C-, he says. More than 1,600 fall in that category.

What should you do if your institution gets low marks? Don't panic. There may be a good reason for the low grade. New banks without a track record of earnings tend to rate low. Or, a bank might have taken some losses, but have plenty of capital, van Doorn says.

Bankrate adds that institutions with a niche business or unconventional strategy might end up being rated higher or lower than they should be. That appears to be the case with Eastern Savings. A television report erroneously said last month that the bank was in danger of closing because of a high rate of delinquent loans on its balance sheet. The profitable bank says its business model is to buy loans in default at a discount from other lenders and then try to collect on them, so the appearance of so many bad loans on its books isn't what it looks to be.

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