Financial collapse of banks not indicative of overall industry
August 7, 2008
The collapse of IndyMac Bank and more recently First National Bank of Nevada has lead to speculation about which other banks are most at risk. For many years, I had few concerns about the solvency of our banking system. Banks were profitable and their balance sheets looked good. Now there is a crisis of confidence again in the credit markets.
Each time I think that the turmoil in the credit markets is abating, it appears that it is not, so I feel that there may be more banks out there ready to implode. According to the FDIC, eight banks including IndyMac have collapsed since February 2007 and it listed 90 “problem institutions” on its watch list. I tried to find this list, but was not able to. FDIC spokesman Andrew Gray noted that just 13 percent of institutions on the watch list have failed on an average historical basis and that this list is far shorter than the 2,165 names it had on the list back in 1987. I guess that is supposed to be the good news. Some of you may remember that more than 2,300 banks and thrifts went up in smoke during the savings and loan crisis 20 years ago, so what is different this time?
Federal regulators seized IndyMac after the bank buckled under pressure of mounting consumer loan delinquencies and depleted capital reserves. As a result, the collapse hurt consumer confidence a great deal. No one wants to rely on FDIC to pay back depositors. The problems with FannieMae and Freddie Mac only add to industry concerns. The issues with IndyMac show that people are becoming more and more hesitant to look at the mortgage industry as a solid opportunity for investment or deposits. This brings up the issue of bank failures actually prolonging the downturn in the real estate market. If more banks fail, that could be true. If many banks that provide real estate lending fail, it may be yet another blow to the recovery of home prices.
My suggestion is that in a time of uncertainty with regard to banks , that you may want to pay attention to FDIC-insured deposit limits. The FDIC insures individual and joint accounts up to $100,000 per person and covers 50 percent of any amount above that threshold. Retirement accounts are insured up to $250,000 per person and trusts are insured up to $100,000. If you are unsure about deposits that may be above the FDIC limits, you can simply ask your bank.
If you have deposits above the FDIC limit, you may want to consider U.S. Treasury funds. These funds are backed by the full faith of the U.S. government regardless of how much money you invest in them. Also, many brokerage firms offer enhanced FDIC-insured accounts. It is important right now that you ask if your deposits are insured, and if they are not, what to do to ensure that you are protected.
Times may be tough for the banks right now, but there is no reason for panic. Just play it safe and keep in mind your insured deposit limitations. More bank failures are likely before we see our way out of this mess, but if you keep in mind your deposit limitations and diversify, you should be fine.
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• Carol Perry is affiliated with Carol Perry and Associates of AWA Wealth Management. Carol Perry has been a Northern Nevada resident since 1983.