Is Your Bank Going To Survive?

Over the past year, nearly 50 banks have failed. Some of our nation’s biggest and oldest banks are walking a fine line between survival and failure as the economy worsens. Bank customers experience a great deal of uncertainty when their bank fails. For many customers, it’s simply an inconvenience. The FDIC insures customer deposits up to $250,000 currently, so the average bank customer doesn’t lose money when their bank goes under. But for customers who keep an amount higher than the FDIC coverage limit in the bank, a bank failure can result in catastrophic financial loss.

It’s impossible to say for sure which of today’s banks will be here 6 months or a year from now. Lawmakers have started using the term “zombie banks” for banks that are operating on borrowed money and time. There are some measures we can examine to determine the strength of a bank however. As you are considering your banking relationship, consider the following factors:

-  Loan Loss Reserves: Banks are sitting on a mountain of loans that they will never be able to collect on. We have all heard about the billions of dollars banks have taken in write-downs of bad loans over the past year. The loan loss ratio can tell you how well prepared a bank is for loans that will fall into default. This number should be between 1 and 2 percent.

- Tier 1 Ratio: If you have heard about banks having to “raise capital” recently, what they are trying to do is improve the strength of their balance sheet. Raising cash helps investors and customers feel comfortable that the bank has sufficient liquidity and access to cash to continue operations. A well capitalized bank has a Tier1 ratio of at least 6%.

- Nonperforming Asset Ratio: This number tells you what percentage of a bank’s loan portfolio is not current. Usually a loan payment has to be 90 days overdue before a loan is considered nonperforming. Ideally, a bank should be below 3% on this measure.

While it’s not too exciting to research various banks to see who seems the strongest, it wouldn’t hurt to take a look at the numbers on your local bank and make sure you don’t see any warning signs. All of these numbers are available in your bank’s annual report, which should be available online.

As a bank customer, you have no control over the destiny of your bank. What you can control is the amount of risk you are exposed to in your banking business. If you have more than $250,000 in a single bank, you risk losing any money over that threshold amount. Keep your balances under the FDIC limit at all times so that your biggest worry is making adjustments to your direct deposits and automatic withdrawals.

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