What Happens If More Banks Fail?

July 15, 2008— -- CHARLOTTE, N.C. (AP) -- The government's seizure of IndyMac Bank raises concerns for many consumers about whether their banks might be next.

While it is unlikely the nation will see thousands of banks fail as they did during the savings and loan industry collapse in the late 1980s and early '90s, analysts predict there will be more battered financial institutions that are unable to survive in today's marketplace.

"IndyMac's failure is certainly a broader issue," said Eva Weber, an analyst at Aite Group, a financial services research firm. "Those who are trenched in more risky business, who are feeling more heavy losses, may be at more risk."

On Friday, the Office of Thrift Supervision transferred control of the California lender to the Federal Deposit Insurance Corp. because it did not think IndyMac could meet its depositors' demands. By Monday, the bank reopened as IndyMac Federal Bank, FSB, and customers whose deposits were insured by the FDIC were able to access full banking services, including online banking, during normal business hours.

IndyMac, like many of the nation's banks, was facing pressures of tighter credit, tumbling home prices and rising foreclosures. In recent weeks it had experienced a run on the bank, with depositors pulling out $100 million a day.

Here are some questions and answers about the government's role when a bank fails and if other banks are at risk:

Q: Why did the government seize IndyMac's assets?

A: Regulators closed IndyMac after customers began a run on the lender following the June 26 release of a letter by Sen. Charles Schumer, D-N.Y., urging several bank regulatory agencies that they take steps to prevent IndyMac's collapse. In the 11 days that followed the letter's release, depositors took out more than $1.3 billion, regulators said.

In a statement Friday, Schumer said IndyMac's failure was due to long-standing practices by the bank, not recent events. And on Sunday, he noted that IndyMac was more heavily involved in originating riskier mortgages than traditional community and regional banks, which weakened the bank's finances.

The financial institution spent the last two weeks trying to reassure customers that it was not near default, including announcing that it had stopped accepting new loan submissions and planned to slash 3,800 jobs, or more than half of its work force.

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 their 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 FDIC put in charge of IndyMac, reassured consumers late Sunday 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.

"I think the important point to make is that, historically, only a very small percentage of the banks on our problem banks list ever failed," Bovenzi said on CNN. "While there are 90 banks on the list, there would be no expectation that 90 of those banks would fail."

According to the FDIC, IndyMac is the fifth U.S. bank or thrift that has failed this year. In 2007, only three financial institutions failed, a small number when compared to the 2,808 institutions that failed between 1982 and 1992.

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 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 Web site, at http://www.fdic.gov/deposit/deposits/insured/yid.pdf.

While keeping more than the limit at any bank means taking a chance, the risks can be bigger with smaller companies, provided they're heavily exposed to mortgage and other debt during the current downturn.

"Consumers may want to pick an institution that has a substantial brand," Weber said. "But you don't necessarily want to run to a big bank because you think a smaller bank is going to fail."

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 Reserve 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 their 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 of institutions -- almost 94 percent -- paying between 0.05 percent and 0.07 percent.

Q: Does the government's decision to aide 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."

Even so, the exact outcome is left to be seen, Weber said.

"One must have a bit of faith in the FDIC that they are going to be able to take care of whomever fails," she said.