September 28, 2008

The FDIC Watch List: Should You Pull Your Money Out of Your Bank?

Yesterday, I was buying groceries at the local HEB and as usual, I whisked my debit card through the little black box, inputed my passcode, and waited for my receipt ... only to have the cashier ask me to run the card again - it hadn't gone through.

Now, I always know the balance in my checking account and my first thought was Identity Theft! But with today's economic mess, right on its heels was my second thought, My Bank's Gone Under!

Turned out that the cashier hadn't pressed a button, and my second attempt worked just fine ... but I got to wondering about the security of my bank deposits and went surfing on the web to investigate.

Here's what I learned:

1. On August 26, 2008, FDIC chairwoman Sheila Barr had a press conference where she announced that 117 banks were now on the FDIC "watch list," up from 90 banks at the beginning of the year. So, they've added 27 banks to the list in the past 8 months. It's the highest number in the past 5 years.

2. At this press conference, the head of the FDIC didn't release the actual list. The feds don't want to give out that actual information, because they are afraid that depositors will read the list, and run to take their money out of those banks on the list. The FDIC Watch List is as big a secret as the recipe for Kentucky Fried Chicken, it seems.

Of course, there's not enough cash in these banks to cover a run - banks loan money, that's how they make a profit (think Jimmy Stewart in It's A Wonderful Life) ... and the FDIC would have to step up and provide cash to cover the depositors' demands - and that's true for the healthiest of banks. The problem these days, apparently, is that loan business hasn't been profitable.

3. So far this year, 13 banks have failed in the US (WaMu was number 13). Only three (3) banks failed in 2007. A banking analyst interviewed by ABCNews opines that we'll see over 100 bank failures by the end of 2009, although most will be "small institutions."

4. LACE Financial (a company that monitors the banking industry) reports that for commercial and savings banks, net income was 74% lower in the 2nd quarter of 2008 (April, May, June) than it was for the first quarter (Jan, Feb, March) -- and that the 2nd quarter of 2008 was 87% lower than it was last year, in 2007. This is industry-wide: sounds like banks are not making any money, huh?

The FDIC Watch List -- and Other Bank Ranking or Watch Lists

5. There are companies or groups that rank the safety of banks, independently of the FDIC. These include:
  • Bauer Financial (go to their site, find your state or your bank)
  • LACE Financial (LACE doesn't offer up its "Watch List" online for free; however, it does report that in the second quarter of 2008, its D List (next to the lowest ranking) rose by 40% and its E list (lowest ranking) rose by 64%. Right now, LACE has 684 banks on its D List, and 490 institutions on its E list. And, LACE also finds its List to be more accurate than the FDIC Watch List, because the FDIC List has to await the bank examination process and the CAMEL ratings - the LACE list is simply faster to finalize. )
  • VeriBanc (you're invited to call and chat with them -- but there's a fee)
  • The Implode-O-Meter (a non-industry participant that has created its own ranking system and website list -- "implode," defined as "the "imploded" status is somewhat subjective and does not necessarily mean operations are ceased permanently: it can mean bankruptcy filing, temporary but open-ended halting of major operations, or a "firesale" acquisition. The Companies include all types (prime, subprime, or a mix of both; retail or wholesale; subsidiaries and entire companies). Note: Companies listed here may still be operating in some capacity; check with them before making assumptions." According to this Watch Group, 286 major financial institutions have "imploded" in the US over the past year and a half (since 2006). )

So, with this scary news, what do you do? Do you pull your money?

6. If you've got money in a bank, the first thing you should know is whether or not your money is deposited at an institution that is protected by the FDIC. Go check the FDIC online list to find out. Whether or not the FDIC is strong enough to handle the hits it may be facing is one issue (watch for an upcoming post on that concern)but not having your money in an account that's even offered FDIC protection is another. If you're banking, then you want FDIC protection.

7. Next, remember that the FDIC doesn't cover everything -- the contents of your safety deposit box aren't covered; any amounts over $100,000 in your checking account and $250,000 in your IRAs aren't covered; money market funds, etc. are not covered. Move your funds around, as needed, to make sure you are within the guidelines -- and if you've got cashed stashed in those safety deposit boxes, think about whether that's the best place for it to be.

8. If your bank fails, and it's protected by the FDIC, then you may face a couple of days where access to your account might be hampered. Keep some cash on hand, if you can, to cover the necessities -- diapers, gas, things like that.

9. If you choose to take your money out of a bank, then you're faced with difficulties. First, how to protect it. That's one reason for a bank, right? Fire, burglary - these are real threats to your nest egg. Also, you're going to face a difficult time paying your bills if you've been accustomed to writing a check, or paying online. You can pay by money order, but it's a hassle. Maybe you stash cash and keep an account open at an institution you consider safe, just to pay bills - keeping as little cash there as possible, depositing right before you pay the monthly invoices?

What does all this mean?

10. Here's LACE Financial's outlook:

The financial condition of the U.S. banking system is rapidly deteriorating as the increased number of banks on the LACE Watch List reflects. It appears to us that nineteen of these banks should have already been closed and thirty-two other banks require capital infusions or regulatory assistance. A major cause of failure for several of these banks will be due to high concentrations in real estate construction lending. Given the likely resource constraints of Federal regulators, we would expect a measured closure rate of approximately ten banks by the end of 2008 with failure rates accelerating after the first of the year. As such, LACE Financial maintains a negative outlook for the U.S. banking system.

11. For me, this means that this Fall will be bad, but next year will be worse -- unless some major events transpire. In my surfing around, I've started to see the phrase "slow depression," mentioned quite a bit. I'm going to pray and study a lot, take it a day at a time, and a step at a time, and I'm going to read those folk over at the Daily Reckoning, among others. They've been warning about this crisis for a long time now.

Fear is Your Enemy

Fear can hurt you, even destroy you. This is no time to panic, it's time to be smart. You will get through this. Everything is going to be alright -- maybe not the same, but you and yours will be okay. And, if you're already in the process of living a simplicity lifestyle, you're ahead of the game.

For more information:

What is Simplifying? Should You Do It?
Starting to Simplify - Step 1
Starting to Simplify - Step 3
Are You Brave Enough to Read Empire of Debt?
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