Is Your Bank at Risk of Failure?
Could your bank fail? What you need to know when stashing away your cash.
Nov. 19, 2007 Special to ABCNEWS.com — -- Concerns about liquidity in the banking system have raised the possibility that there will be an increase in bank failures in the next year or so.
Bank failures in the U.S. are rare--the three logged so far this year are out of nearly 8,000 banks in existence--and there have been just 28 since 2000. From mid-2004 until this February. there were no failures, the largest span of time without any since the Great Depression.
But the credit meltdown that has simmered since the summer has depleted capital levels, and banks are getting stuck with mortgage-related assets, the values of which have declined sharply in the last few months. Regulators have been fretting about the problem since early this year.
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"Some have come to believe that the FDIC should not spend any time worrying about or planning for a large bank failure because these banks have become so well diversified and sophisticated in their risk management," said FDIC Chairman Sheila Bair in a speech to the Exchequer Club in Washington, D.C., in March. But, she added, "it does not mean we can rule out potential problems."
Banks fail because they either run out of capital to support their ongoing operations, their asset values drop below that of their liabilities, or fraud forces regulators to step in and take over. Most bank failures are of small institutions. There have been just two failed banks with more than $1 billion of assets since 2000.
If your bank is failing, you probably won't know about it. Regulators deliberately keep a pending closure secret to avoid a mad rush to remove deposits--a run on the bank, if you will. For one thing, a sale of the institution is often possible at the last minute, eliminating the need for federal intervention. But a buyer isn't going to take on the deal if all the deposits rush out the door. For many customers, the first time they know their bank has been shut down is when their credit card gets declined or they walk to their branch and notice it's closed.
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