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Number of 'Problem Banks' at<br> 17-Year High

What happens if your bank fails?

The nation may be facing a new round of bank closures as the number of "problem banks" reaches a 17-year high.

According to the Federal Deposit Insurance Corp., the agency in charge of safeguarding bank deposits, the number of potentially unstable banks rose to 860 in the third quarter of this year, the highest level since 1993. Last year for the same period, the agency put the number at 552.

Since the recession began, bank stability has been a major concern for Americans who are retired or nearing retirement, many of whom keep part of their nest eggs in banks.

Could your bank shut down?

Banks face a higher risk of failing when they have weak reserves, perhaps not enough to offset losses on bad loans. But FDIC spokesman David Barr says that customers of FDIC-insured banks needn't worry.

In most cases, when a bank closes its doors, a new institution takes over right away and often retains the same branches, giving customers uninterrupted access to their accounts. In the minority of cases in which a takeover doesn't happen immediately, the FDIC mails customers checks for the amount of their account balances, guaranteeing up to $250,000 per individual account and $500,000 per joint account.

Barr told the AARP Bulletin that the recession and increasing pressure from bad loans, particularly concerning commercial real estate, were largely to blame for the increase in troubled banks. He says the FDIC expects 2010 "to be the peak year" for bank failures and that the number will "taper off and decline" beginning in 2011.

A total of 41 banks failed in July, August and September, an average of three banks per week. About 127 banks have closed their doors so far this year.

Though the industry continues to feel the effects of the weak economy, there was some good news in the latest FDIC report: Banks and savings institutions reported a $14.5 billion profit in the third quarter of 2010, a $12.5 billion improvement from the third quarter of 2009.

FDIC Chairman Sheila C. Bair said in a statement that she was "cautiously optimistic about the outlook."

The FDIC does not disclose publicly which U.S. banks are listed as problem banks for fear of causing a run on those institutions. However, there are unofficial websites that attempt to assess the health of particular banks by using various sources of publicly disclosed information.

The FDIC has searchable databases that provide general financial information on specific banks as well as trends in the industry.

Carole Fleck is a senior editor at the AARP Bulletin.

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