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OMG is My Bank Failing?!?

Typically, we don’t know until it happens.  Banks do not send out advance notice that they are failing because obviously it could create a “run on the bank.”  Federal Deposit Insurance Corporation (FDIC), an independent governmental agency, will not give us advance notice either.  But there are ways of finding out before failure happens.

First, it is important to understand what happens when a bank fails.  In most cases, the FDIC and/or the Office of Thrift Supervision (OTS) assume control of the bank.  If at all possible, FDIC/OTS tries to assume control over a weekend in order to not disturb normal business activity.  In most cases, deposit accounts such as savings, checking, certificates of deposit (CD) are “purchased” or transferred to another bank in the area.  Most services such as safe deposits and ATM continue as usual.

FDIC does provide deposit insurance up to $100,000 per depositor and up to $250,000 per owner on certain individual retirement accounts (IRAs).  Our hard earned money should be safe (record keeping tip: keep at least one year of account statements).  We may have to deal with the inconvenience of going to a new bank to make deposits to our account and eventually make changes in direct deposits and banking online (assuming new bank has that service).

As a consumer we have a right to know if our bank is failing.  I personally don’t want to reward a bank for risky business practices with my hard earned money.  Banks are required to file quarterly and annual financial disclosure statements with FDIC and other bank regulators.  These statements are online.  However, you have to be a financial analyst to figure out what these statements mean.

There are three bank rating services available for free and online.  These bank rating services may not cover all banks.  I suggest using all three services to compare the ratings and to possible find your bank.  Make sure you understand what the rating systems mean.

The other things to consider are: 1) these rating services are only as good as the analysts that work for them; and 2) most importantly, there may be a conflict of interest involved since some of the rating services’ clients are the banks they rate.

A.M. Best provides a bank rating service and summary of reports of key financial ratios.  The site is not user friendly and may require some searching.  It’s targeted customer is financial analysts but it does work and it is (relatively) free.

Bankrate.com offers a service called “Safe & Sound” that provides bank ratings.  This service is user and consumer friendly.  It provides a good explanation of it’s rating system.

Bauer Financial also offers a free bank rating service.  It also provides ratings for credit unions.  This service is user and consumer friendly.  They say they recommend all four-star and five-star institutions that they rate.

As part of financial regulatory reform, we need to demand more transparency from banks and governmental agencies.  We need more consistent accounting rules governing the disclosure of “loan impairment” (accounting term but important for disclosure purposes) by banks.  As consumers and benefactors to the financial system we need better disclosure reports that are relative easy to understand.  It can be done.  We should not have to go to a rating service to determine if our bank is failing.

Proposal:  There are three ratios that are important to determining the condition of a bank’s assets (loan portfolio):

1. Total risk based-capital ratio – total capital divided by its risk-based assets;
2. Noncurrent loans to loans ratio – measures the percentage of a bank’s loans that are more than 90 days overdue and haven’t been written off; and
3. Loss allowance to noncurrent loans ratio – measures amount of money reserved in loan loss allowance account divided by the number of bank’s loans that are more than 90 days overdue.

These ratios must be compared to the ratios of other banks or peer groups.  FDIC can provide this information very clearly on its website.  The information is already there it just needs formatting.  Besides, are banks scared of “perfect information”?