Q-and-A: Researching Financial Institutions and Advisers

Q: One of our local banks is getting some bad press, and I have a savings account with them. How do you know if a bank is still in good standing? –Jean, Washington

A: Bank failure is a rarity, even during these tough economic times. I find that people worry too much about the health of their banks and credit unions.

Instead, concern yourself with the following:

1. Does your bank or credit union have federal-insurance coverage on its deposits? Be sure you don’t exceed the insurance-coverage limits in a particular bank or credit union.
2. How soon would your deposits be made available in the unlikely event that your bank or credit union fails?

Insurance Coverage
There’s confusion about the deposit-insurance limits on money deposited in banks or credit unions.
 
The Federal Deposit Insurance Corporation (FDIC) insures all deposits at insured banks, including money in checking and savings accounts, money-market deposit accounts, and certificates of deposit (CDs)—up to the insurance limit.

The FDIC does not insure the money you invest in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities—even if your purchase these products through an insured bank.

All non-interest-bearing transaction deposit accounts at an FDIC-insured institution, including all personal and business checking accounts that do not earn interest, are fully insured for the entire amount in the deposit accounts. This unlimited insurance coverage is temporary and will remain in effect for participating institutions until Dec. 31, 2013.

All other deposit accounts at FDIC-insured institutions are insured up to at least $250,000, per depositor, until Dec. 31, 2013.

On Jan. 1, 2010, FDIC deposit insurance for all deposit accounts—except for certain retirement accounts—will return to at least $100,000 per depositor. Insurance coverage for certain retirement accounts, a category that includes all IRA deposit accounts, will remain at $250,000 per depositor.
For more information on FDIC insurance coverage, visit the FDIC Web site.  The site has an online tool, EDIE (Electronic Deposit Insurance Estimator), which can help you assess whether or not your various deposits are covered by FDIC insurance.

For more information on insurance coverage for credit-union deposits, visit www.ncua.gov.

Access to Money in Case Bank Fails

Federal law requires the FDIC to pay 100 percent of the insured deposits—including principal and interest—"as soon as possible" after an insured bank fails.

In practice, the FDIC pays insured deposits within a few days after a bank closes, usually the next business day.

In most cases, the FDIC provides each depositor a new account at another insured bank. Or if arrangements cannot be made with another institution, the FDIC issues a check to each depositor. The same general rules apply to credit-union deposits.

 Q: I have CDs coming due and want to find a list of financially sound banks. Where would I find this? –Rita, California

A: With all the turmoil in the financial market and the increasing number of failed banks, big and small, it’s no wonder you’re looking for a financially-healthy institution.

Bankrate.com has developed a system for evaluating a depository institution’s relative safety. Its Safe & Sound® service provides ratings information on the relative financial strength and stability of U.S. commercial banks, savings institutions, and credit unions.

The Bankrate.com system applies 22 tests to each institution to measure the institution's capital adequacy, asset quality, profitability, and liquidity. Combined results form the basis of the Safe & Sound® ratings. Institutions are ranked from five stars (best) to one star (worst).

While no rating system is fail-safe, the Safe & Sound® program can help you at least steer clear of financial institutions that receive very low rankings. As noted earlier, however, you shouldn’t be terribly concerned about bank failures, because they are such a rare occurrence.