Bank Failures: Protect Your Cash Now

Sept. 2, 2008 — -- Back in April, I called bank failures a "rare occurrence" that few of us, born after the Great Depression, worried about.

It might be time for me to re-evaluate that description.

Since April, eight more U.S. banks have failed for a total of 10 this year, and more failures are on the horizon as the industry copes with the consequences of loose lending standards and bad decision-making.

The latest failure came Friday when the Federal Deposit Insurance Corporation seized control of Integrity Bank of Alpharetta, Ga. Integrity's five offices reopen today as branches of Regions Bank, a major Southeastern regional bank that assumed Integrity's $974 million in deposits. That means depositors will have full access to their money, even if their accounts exceed FDIC insurance limits.

The likelihood that this will not be the last bank failure this year is evident in the FDIC's announcement days before the Integrity takeover that 117 banks are on its "problem list" of troubled institutions. That's the most that have been on the list since 2003, and more are expected to join it as credit problems worsen, according to FDIC chairman Sheila C. Bair.

With more than 8,000 banks operating in the United States, chances are your bank will not be among those that fail and are taken over by the FDIC. But given what's happened in recent months, consumers should consider what steps they should take to protect their deposits.

The essential first step is to make sure your deposits are fully insured. Given the current turmoil in the banking industry, there is no good reason you should leave a single dollar uninsured by the FDIC or the National Credit Union Administration.

This is true, especially if you read news accounts indicating your bank is struggling with a large volume of bad loans, or otherwise struggling. One way to check on the health of your bank is to visit Bankrate.com's "Safe & Sound" ratings.

As most depositors know, the basic insurance limit on bank deposits is $100,000 at a single bank. If you know the rules well, however, it is possible for a single person to extend that coverage to more than $500,000 at one bank. This can be done by utilizing multiple account ownership categories, since the $100,000 insurance limit applies by account category.

What to Do If Your Bank Fails and Is Taken Over by FDIC

That means one person can be insured for up to $100,000 for a single account and another $100,000 in a joint account with a spouse or someone else. Other ownership categories include payable-on-death, irrevocable trusts, and corporate accounts.

Also, there is a $250,000 insurance limit for IRAs and other certain retirement plans containing bank deposits, rather than mutual funds annuities or other securities sold through a bank.

If you hold more than $100,000 in any combination at a single bank, I'd suggest you visit the FDIC's Electronic Deposit Insurance Estimator at www.fdic.gov/edie. It is an online calculator that will help you to be sure your deposits are fully insured.

Now, what if you wake one morning to find your bank taken over by the FDIC? What do you do then?

First, I'd resist the urge to rush down to the local branch and wait in a long line as folks did when the FDIC seized IndyMac Bank in July. If your deposits fall within the insurance limits, there is no reason to panic. And if you're over the limits, it's too late to act.

Depending upon the circumstances, uninsured deposits may or may not be accessible right away. But once the FDIC has taken over, that decision has already been made.

According to a recent FDIC consumer newsletter, here is what happens when a bank fails and the FDIC takes over:

In most cases, the FDIC makes insured funds available on the first business day after the bank is closed. And often, funds are available before then through a bank's ATM network, as happened with Integrity this past weekend.

The FDIC tries to find a healthy bank to quickly buy rights to assume the insured deposits. Depositors automatically become customers of the assuming bank, and offices open under the name of the new bank. This is what is happening with the Integrity Bank and its takeover by Regions Bank.

If the FDIC cannot find another bank to buy the insured deposits, one of two things can happen. One, the FDIC can transfer assets to a newly created bank it runs until a buyer is found. The other alternative is the FDIC can issue checks up to the insured limits directly to depositors. That process usually will not take more than three business days, says the FDIC.

Some types of deposits may take longer to deal with. These include accounts linked to a trust, employee benefit plan deposits, and bank CDs bought through a deposit broker.

What happens if your deposits at a failed bank exceed the insurance limits?

You will have access to your funds up to the insured limit, but possibly not the rest. For instance, if you have a single account with $105,000, you have access to $100,000 but the remaining $5,000 may be tied up for up to several years as the FDIC tries to sell the failed bank's assets. And even then, you may not get all your money back.

That's not a chance worth taking. Check now whether your deposits are fully insured, and consider how you might respond if your bank becomes the 11th to fail in 2008.

This work is the opinion of the columnist, and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning (www.fourpondsfinancial.com) in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com.