Help me pick safer banks?

September 6, 2008 11:27 AM

Choosing a safe(r) bank? I've been using WaMu as my primary checking/savings for years. There's lots of noise about them being on the list institutions vulnerable to failure. My secondary regional bank also just got downgraded to one step above junk. I'm happy the FDIC is there, but as a freelancer, I think it'd be especially bad to have my deposits locked up for a while. So, where and how should I be looking?

I also have accounts at some regional credit unions. I've considered moving there, because my vague impression (based on talking to them as a potential mortgage customer during the housing bubble) is that they went less insane than other institutions.

However, I'm not really sure I want to be making decisions on vague impressions, and it would be highly convenient to have money in at least one national institution.

I've been to BankRate.com. It's giving me high ratings for both WaMu and my other regional bank when I know their credit ratings have recently been downgraded. Does this mean I don't understand the Safe & Sound CAEL Rating, or that I don't understand the major credit ratings? Or does it mean they're on outdated or incorrect information?

Are there indicators I should be looking at beside ratings? For example, I've also heard that highly active participation in Credit Default Swaps is a strong indicator of potential trouble...

Lastly... am I overthinking this bank of beans? Is simply dividing my deposits over 3-4 institutions most likely to get me the most reduction in risk for the amount of time I might invest in research and understanding?

Thanks!

posted by weston to Work & Money (23 answers total)

I think you're overthinking it. Take a pass on the interest and put some cash in a safe deposit box, if you're worried.
posted by meta_eli at 11:47 AM on September 6, 2008

I'm a superbear but access to your money is safe, in that I fully expect no more than an hour of interruption in account services at Wamu should they go down like they so richly deserve to.

But it wouldn't hurt to move a month's worth of money into your credit union to be safe.

The bulk of your savings should be split between ING, HSBC, and/or Citi online accounts, IMO.

100% of my ready cash savings are with HSBC, and their Level 3 misdeeds are somewhat troubling, but my primary checking is with WFC and I can handle any reasonable delay getting my savings out of HSBC.
posted by troy at 11:48 AM on September 6, 2008

The Unofficial Troubled Bank List
posted by milkrate at 1:06 PM on September 6, 2008

I hope WaMu doesn't go bust. I like my 0% money and insane cash back on fuel purchases (and more reasonable, but still large cash back at grocery stores and pharmacies)
posted by wierdo at 1:38 PM on September 6, 2008

Unless you have a ton of money that wouldn't be protected by the FDIC insurance, or a share holder in the corporation, don't worry about it. That's what the FDIC is for- insuring people's deposits in banks.

When a bank fails, the FDIC shows up Friday afternoon, kicks out all the management and reopens for business on Monday. Almost no customers would ever be aware it if it wasn't on the news. Yeah, it would suck if you needed a cashiers check on Saturday, but even then, I'd bet you could find a way to make it work.

In fact, if I can speechify for a moment, the best thing you can do as a consumer is make your decisions based on the service you receive from them. If there's no reason to change, don't. Let the banking system work out its troubles.
posted by gjc at 2:04 PM on September 6, 2008

On preview, I just scrapped everything I wrote. gjc said it all above. Don't worry and keep your money under the FDIC limits.
posted by Gerard Sorme at 2:22 PM on September 6, 2008

Response by poster: So, to be clear, the fear that there's any possibility I would lose access to deposited funds for more than a few days is misplaced?
posted by weston at 3:09 PM on September 6, 2008

As long as you are under FDIC coverage, yes, your fear is misplaced.
posted by SeizeTheDay at 3:21 PM on September 6, 2008

Yes,

The FDIC is there for that reason. only if you have over $10,000 or a share holder you are 100% safe you would have some problems if you try to get your money the first day the FDIC takes over because everyone in the world would be in line with you but other then that you would be fine.

The reason they don't say which banks are having problems is so that people don't do what you are thinking about doing because then the bank would fail
posted by CollegeNelson at 3:25 PM on September 6, 2008

Sorry I mean $100,000
posted by CollegeNelson at 3:29 PM on September 6, 2008

When a bank fails, the FDIC shows up Friday afternoon, kicks out all the management and reopens for business on Monday.

I agree that the asker's worry is misplaced. But the IndyMac takeover wasn't exactly as smooth as you suggest.
posted by meta_eli at 5:00 PM on September 6, 2008

Response by poster: Way to put it all back in play, meta_eli. :)

Seriously, I'd thought I'd read somewhere that funds protected by the FDIC might not be available for up to six months. This appears to be false, and I appreciate the reassurance from everyone. Thanks!
posted by weston at 7:15 PM on September 6, 2008

Slate has an article on why banks fail on Fridays. In short its so they can get it back on its feet by Monday.
posted by Ookseer at 9:38 PM on September 6, 2008

I think the six months thing is on non-FDIC-protected funds. If you're over the $100k limit then you basically have to line up and get paid out similar to any other debtholder (although I think you get paid out before the bondholders and others). Since in that situation there's the possibility of loss — you might get less than $1 back for each $1 deposited — depending on the bank's assets, it can take a while to sort out.

But if you're under the limit there's no question that you're going to get the total amount of your deposit back out (that's what the Government, by way of the FDIC, guarantees), so there's no real need to screw around.

A few months ago a bank that I used failed (NetBank, out of Alpharetta), although thankfully with only a couple of dollars in the account.* The FDIC came in Friday and by Monday I had an account with ING Direct with my money in it. My understanding is this is one of two common paths that the Feds take; sometimes they continue operating a bank's systems for a while in order to ensure access, and sometimes (more commonly?) they transfer the insured accounts immediately out to another bank that's been selected to take them over.

I was prepared to just write off the money in the account if it was in any way a PITA to get back, but surprisingly it was not. For a quasi-government agency, the FDIC displays an unusual lack of incompetence.

* I had recently transferred my money to a different bank, although not for any good reason or because of any foreknowledge of NetBank's collapse — in truth, I moved my money when I happened to use up my last paper check, and this just happened to be right before they imploded.
posted by Kadin2048 at 10:42 PM on September 6, 2008

Just before IndyMac went kaboom, the FDIC was reported to have $51 billion in assets. The latest estimated hit to their balance sheet from IndyMac is $8.9 billion (which is quite above the original estimates, and may need to be revised upwards again soon). A few other banks have gone bust simce then too, but they were much smaller and not as pricey. Let's assume the FDIC has $42 billion left, or so.

Washington Mutual currently has $181.9 billion in deposits, according to this possibly-relevant-and-certainly-timely news story from yesterday. It is one of the top ten largest US banks, by deposit base.

Probably a decent chunk of that $181.9 billion are (stupidly) over the FDIC limits. But let's say for argument's sake that $100 billion are insured, the rest uninsured.

$100 billion > $42 billion. If WaMu went under, the FDIC in its current state and capacity could not cover the insured deposits. The remainder of the money will probably have to come from an emergency funding bill from Congress, because they will not let the FDIC fail. That money will have to come through, from somewhere. But that doesn't mean things will be clean and quick, either. If (when) WaMu goes under, the IndyMac customers' experiences may look like the model of order and efficiency.

And the vaunted FDIC guarantee is only that you will get your under-the-limit money back eventually, in as timely a fashion as is possible. Historically, that has meant a weekend. But that may not always be the case if a lot of banks, especially big banks, start failing close together, simply because of the logistics involved.

Or, to put it another way, the answer to this question is based on both your math skills and your personal level of faith in the competence and efficiency of the government.
posted by Asparagirl at 11:48 PM on September 6, 2008

Also, check out "How Safe is My FDIC-Insured Bank Account?" - which references Section 11 of the FDIC Act of 1933 on the "how long to a payout" question. (And it was written before IndyMac, I should add...)
posted by Asparagirl at 11:58 PM on September 6, 2008

That money will have to come through, from somewhere.

The FDIC has a gigantic line of credit (if I remember correctly, upwards of $60 billion) from the Treasury that has never been used. In addition, the FDIC raised premiums it's charging banks (I think back in February of this year), and is anticipated to do so again this October or November (these premiums are what fund the FDIC and keeps depositors' insurance a mostly private payout). Goto the FDIC website and read their annual report.

Probably a decent chunk of that $181.9 billion are (stupidly) over the FDIC limits.

Part of the reason the banking system works is faith. Businesses, wealthy people, etc. take the risk that the bank is going to be around. Normally, it's not that big a leap of faith. So they usually have deposits in the millions, or tens of millions. You ask, why not stick it in Treasuries? Well, liquidity, for one. I need the money now, not tomorrow, and the bank will ensure that I get it. Liquidating a Treasury, while simple and cheap, is not immediate.
posted by SeizeTheDay at 6:00 AM on September 7, 2008

Here's a link to the OTS assessment of WaMu's deposits as of 6/30/2008.
posted by SeizeTheDay at 7:30 AM on September 7, 2008

Liquidating a Treasury, while simple and cheap, is not immediate.

If you have a lot of money, what about holding 13 separate 13-week treasuries, each set to expire/renew one right after the other, so that there's always one rolling over that week which you can cancel and then turn into cash? (I know, the interest rate is awful, and this is needlessly complicated, but I'm just throwing it out there.)
posted by Asparagirl at 9:56 AM on September 7, 2008

Washington Mutual currently has $181.9 billion in deposits, according to this possibly-relevant-and-certainly-timely news story from yesterday. It is one of the top ten largest US banks, by deposit base.

Probably a decent chunk of that $181.9 billion are (stupidly) over the FDIC limits. But let's say for argument's sake that $100 billion are insured, the rest uninsured.

$100 billion > $42 billion. If WaMu went under...

But a bank failure isn't "poof, the money's all gone". It gets taken over way before that happens.

It's failing to meet the liquidity requirements. They bought too much stuff and kept too little cash around, and couldn't get out from under that for some mismanagement reason. It's not like these mortgage instruments are valueless, they are simply not as profitable as they need to be to meet cash flow and reserve requirements.

In some ways, these bank failures are good for business. It shows the strength of the US banking system, not the weakness. Meaning that the [rational] public sees that someone is watching over their banks and pulling the plug when things get hinky, as opposed to when things explode.
posted by gjc at 8:42 PM on September 7, 2008

And I meant to mention, the IndyMac article linked to does show that it's not a perfect process. But that was fed, ironically, by the FDIC's desire to get the bank back up and running quickly. If they locked it down for a week and sent letters and whatnot, there would have been less trouble. Better to suffer the lines of idiots misunderstanding what's going on than to have good customers be inconvenienced by not having access to their money for a week.
posted by gjc at 8:45 PM on September 7, 2008

$100 billion > $42 billion. If WaMu went under... This is nonsense.

Accounting 101: Assets minus liabilities equals shareholder's equity. For a bank, "assets" are things like cash on hand, securities owned, and loans made. "Liabilities" are the money that you and others deposited in the bank. Normally, shareholder's equity is positive; if it should become negative, that's what has to be made up by the FDIC.

In the case of IndyMac, it looks like this: $32 billion in assets, $9 billion negative net equity, and thus (backing into this number) liabilities (deposits) of $41 billion or more. ("Or more" because some depositors - those with over $100,000 - may not get back 100% of their money.) In short, the FDIC doesn't care about assets or liabilities, it only cares about negative equity. And it still has plenty of money to handle any possible negative equity at WaMu.

Besides which, the FDIC isn't ever going to fail. First, it can raise the insurance premiums that it charges healthy banks. Second, the U.S. government can authorize the FDIC to borrow money, if necessary, to be repaid in the future by insurance premiums. And third, worst case scenario, the U.S. government will simply give taxpayer dollars to the FDIC, as is going to happen with Freddie Mac and Fannie Mae (which are even less of government entities). We're never again going to see the bank failures of the late 1920s and early 1930s, where small depositors did lose (some of) their deposits, and where it made sense for everyone to try to get money out of a bank before it failed (thus runs on banks by depositors).
posted by WestCoaster at 9:57 AM on September 8, 2008

I went through the Netbank bust. The FDIC moved in late Friday, I couldn't get money Sat. and Sunday, and Monday things were back up under ING. There were a few bumps during the transition, mostly because I already had an ING account, too.

It wasn't bad. I've been through bank software upgrades that were more disruptive. The worst was having to manually move all my bill pay stuff over.
posted by QIbHom at 11:22 AM on September 9, 2008