Friday, June 19, 2009

Bank Safety

What should a depositor DO on finding out that their bank was just dropped to zero star rating by Bauer Financial? The answer to that is, "it depends". Mainly it depends on how much money you have in the bank and what kind of account it is. And what does 'zero star' mean, anyway?

Bauer puts it this way:

All banks are subject to federal regulatory capital requirements, but those requirements vary among institutions and are dependent on many factors. In general, institutions are required to maintain a tangible capital ratio of at least 4%, a tier 1 risk-based capital ratio of at least 4% and a total risk-based capital ratio of at least 8%.

In addition to the capital ratio, other criteria are used to determine Bauer Financial's Star Rating. Some of these include but are not limited to: profitability/loss trend, evaluating the level of delinquent loans and repossessed assets, the market versus book value of the investment portfolio, regulatory supervisory agreements, the community reinvestment rating (CRA), and liquidity. Potential losses on available-for-sale securities, delinquent loans and repossessed assets are forecasted in assigning our star rating. De Novo banks generally can not qualify for a 5-star rating for at least two years.

I worked on a project a few months ago that made it important for me to evaluate certain banking choices made by a client and recommend whether he should take any action based on the stability of one bank or another. Key West is a bank-rich town, out of proportion to its population. There are national (e.g., BankAmerica and Wachovia (Wells Fargo) and regional (TIB, Centennial, Orion, BB&T) banks headquartered elsewhere and a couple of local banks and three local Credit Unions.

The client moved some cash around to balance things out, but felt secure in retaining a relationship with all of the banks that he does business with. His decision was based in part on the FDIC protections in place that allow a failed bank to reopen immediately, on the next normal business day, with no losses and no delays in getting access to funds. 60 Minutes did a segment on the process of seizing banks and reopening them a few weeks ago. The process inspires confidence that the FDIC knows how to at least one thing well -- closing the barn door after the cow got away. His decision was also based on a desire not to punish any bank doing its best to regain its footing.

Not everyone knows that the FDIC increased the amount of insurance on deposits in interest-bearing accounts at FDIC-insured banks, raising the coverage from $100,000 to $250,000 for each individual account. Fewer people know that non-interest-bearing deposits are insured to an unlimited amount. Both of these actions are temporary, the action taken as part of the economic recovery program. Uninsured account coverage is scheduled to end in December 2009 unless Congress extends the duration. The increased coverage on interest-bearing account was recently extended until June 2013.

We keep our own money in the Keys Federal Credit Union, and have since coming here in 1999. KFCU went through a rough patch of management turmoil a couple of years ago, but they're back to being a smooth-running machine since. I haven't been able to find any ratings of this credit union [which is, I guess, a little odd], but the NCUA (same as the FDIC but for credit unions) guarantee is really all we need for our modest holdings.

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