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The facts on bank failure

July 16th, 2008 at 09:24 pm

With the failure and government bailout last week of IndyMac, the fifth bank to fail this year, here are some questions and answers about what happens when a bank fails.

Q.What happens when the government takes over a bank?

A. In such a scenario, called a conservatorship, a bank's regulator takes control of the company and oversees the operations. The move is to maximize the value of the institution for a future sale and to maintain banking services in the communities formerly served by the bank.

Q.Is my bank at risk?

A. John Bovenzi, the former chief operating officer of the Federal Deposit Insurance Corp., which guarantees bank deposits up to $100,000, has said that bank failures have been rare in the past, and that if more banks do fail, the government has enough in reserve. According to regulatory policy, there is no advance notice given to the public before a bank's assets are seized by federal regulators.

Q.How can I make sure my money is safe?

A. All deposit accounts worth $100,000 and less are automatically insured by the FDIC. Many retirement accounts, such as IRAs and 401(k)s, are insured up to $250,000 per person. But since it's a person's aggregate deposits, and not their individual accounts, that are insured, any amounts over $100,000 deposited at any one bank are not covered.

In a joint account, each depositor is insured up to $100,000.

The FDIC has information about its insurance on its website, at http://www.fdic.govdeposit/deposits/insured/yid.pdf.

Q.How much money does the FDIC have?

A. The FDIC has nearly $53 billion in insurance funds. Beyond that figure, Bovenzi said the FDIC would have go to other banks to raise more money, adding that in such a case, consumers could expect to see some of that amount passed on to them in the form of higher fees.

The current estimated loss to the FDIC resulting from IndyMac's failure is between $4 billion and $8 billion.

Q.How big does FDIC like to keep its deposit insurance fund?

A. The FDIC board of directors has set a designated deserve ratio of 1.25 percent. That means their ''target'' balance for the fund is 1.25 percent of estimated insured deposits. As of March 31, the fund was $52.843 billion and insured deposits were $4.431 trillion, which resulted in a reserve ratio of 1.19 percent, 0.06 percentage point below the Board's target. If the fund falls below 1.15 percent of estimated insured deposits, the FDIC is required by law to adopt a restoration plan that will bring the reserve ratio back to 1.15 percent within five years.

Q.Do banks have to pay into the deposit insurance fund?

A. Yes. The total amount depends upon the assessment rate assigned to the institution and the size of its assessment base -- which is roughly equal to an institution's total domestic deposits. Assessment rates are assigned to institutions based upon the risk they pose to the fund, and currently range from 0.05 percent to 0.43 percent, with the vast majority if institutions -- almost 94 percent -- paying between 0.05 percent and 0.07 percent.

Q.Does the government's decision to aid Fannie Mae and Freddie Mac help the nation's banks?

A.Tony Plath, an associate professor of finance at the University of North Carolina at Charlotte, says yes. ''As mortgage money becomes harder to get and real estate prices go down even more, the solvency of many banks is called into question,'' Plath said. ``The Fed is moving to protect the solvency of the banking industry by maintaining integrity.''

Source: http://www.miamiherald.com/business/story/606067.html

11 Responses to “The facts on bank failure”

  1. Broken Arrow Says:

    Nice FAQ!

    I did not know aggregate sum is insured, not individual accounts. I was told by two separate banks and credit unions that each individual account types were covered. (e.g. A savings account, checking account, and a joint account can all be individually insured up to 100k.)

  2. merch Says:

    I don't think you or I have to worry about the 100k limit.

    Market always swings one way too far then the other.

  3. Nic Says:

    At this point my comfort level would not rise knowing my $$$$ was FDIC 'insured'. My first priority would be to get my $$$$$$ INHAND.

  4. Rich Says:

    It doesn't matter if your money is in the bank or under the mattress. With inflation increasing like it is and the value of the dollar tanking, it will be worthless anyway, regardless of where you keep it.

  5. Broken Arrow Says:

    Way to look at it positively, Rich! Big Grin

    But seriously though, it's still a matter of degree of damage control, don't you think? My credit union offers 5% APY. Do you think I should still leave the money in there, or stuff it under my mattress?

  6. merch Says:

    The biggest thing is that we have had 5 bank failures this year. Yes it is up from 0 over the last 2 years.

    But 1988-89, 1,004 banks failed, a rate of one failure every 1.38 days. And yet we survuved that, you bank account was safe.

    Nice straw man with inflation though. Lets see inflation is at 3.9% year over year and the average since 1947 has been 3.85%. So yes we are running higher then average but I wouldn't call it high.

    So basically, the facts don't support your arguement. Now, if you would like to put up another strawman to argue just let me know.

  7. Rich Says:

    But how big were those banks in 1988-1989? Were they mom-and-pop joints or were they large banks like Bear Stearns, IndyMac, etc?

  8. merch Says:

    2 of them totaled over 60 billion and Bear Sterns was not a bank.

    1. Continental Illinois National Bank and Trust, Chicago (1984)
    Total assets: $40.0 billion

    2. First Republic Bank, Dallas (1988)
    Total assets: $32.5 billion

    3. American S&LA, Stockton, Calif. (1988)
    Total assets: $30.2 billion

    4. Bank of New England, Boston (1991)
    Total assets: $21.7 billion

    5. MCorp, Dallas (1989)
    Total assets: $18.5 billion

    6. Gibraltar Savings, Simi Valley, Calif. (1989)
    Total assets: $15.1 billion

    7. First City Bancorporation, Houston (1988)
    Total assets: $13.0 billion

    8. Homefed Bank, San Diego (1992)
    Total assets: $12.2 billion

    9. Southeast Bank, Miami (1991)
    Total assets: $11.0 billion

    10. Goldome, Buffalo (1991)
    Total assets: $9.9 billion

  9. merch Says:

    And really does the size matter? I mean 1.38 banks a day versus less then one a month. You can get up to 30 billion in total assets pretty quick.

    By the way, I only saw 5 bank failures this year.

    Can anyone name the other 4? With asset sizes? The list is the top 10 minus Indy.

  10. merch Says:

    Here are the other 4. Only one of them cracked over a billion.

    May 30 - First Integrity Bank closed by regulators. First International Bank and Trust takes over all of the Minnesota-based bank's deposits. First Integrity held $54.7 million in assets and $50.3 million in total deposits.

    May 9 - ANB Financial NA closed by U.S. regulators. Pulaski Bank and Trust Co takes over the insured deposits. ANB Financial had about $2.1 billion in assets and $1.8 billion in total deposits.

    March 7 - Hume Bank closed by U.S. regulators. Security Bank takes over insured deposits. Hume had total assets of $18.7 million and total deposits of $13.6 million.

    January 25 - Douglass National Bank closed by regulators. Liberty Bank and Trust Co takes over all deposits. Douglass had $58.5 million in total assets and $53.8 million in total deposits

  11. Glass Says:

    I deposited $450,000 into National City Bank, soon to be known as PNC. If the bank fails, how much money can I expect to recover via FDIC?

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