With the failure of several large banks in this country, concern over the banking industry is merited. Since size doesn’t seem to be an issue, both small and large banks cannot be immune from the possibility of failure.
Banks have never been safer! With state bank regulators working with the Federal Reserve, our whole banking industry is in safe hands. Plus, your funds are insured t the legal limit by FDIC.
Safeguards are in place to protect and ensure your funds are on deposit. The FDIC insures deposits up to a limit of $250,000 per depositor. The question in considering your bank and other banks is how do you know if it is safe? While no method is foolproof, there are indicators of trouble or potential trouble. A simple solution is to spread your deposits over several banks to take advantage of the FDIC insurance limits per bank. I want to be perfectly clear that these tips are only indicators and do not mean anything other than an overall indicator of issues.
The first indicator is the amount of risk (loans) the bank has to its available capital. Most banks have a minimum of 6% of reserves available for loan defaults. The more capital reserves a bank has may be an indicator of more financial strength. The higher the reserves, generally the better the financial strength of the bank. Banks often refer to this category as the Total risk-based capital ratio.
The second indicator is the loan to deposit ratio. The lower the ratio, the better indicator of the bank’s strength. Banks can over loan and reduce the ratio, which would indicate possible problems. A reasonable ratio is 95% of deposits to loans.
A third indicator is the percentage of loans in default of 30 days or more. These loans would be considered non-performing loans and would have an effect on the reserves of the bank, as explained above in the risk capital ratio. Any percentage below 5% is a manageable number and will generally not affect a bank’s performance.
Even with FDIC insurance and other government agencies in place to assist and protect the consumer, it is important to know as much about your bank as possible. All banks will provide you the needed information for you to make the smart and correct decision.
This article is intended to serve as a basis for further discussion with other professional advisors both legal, financial and tax. We have made every effort to provide accurate numbers and explanations. The information in this report should only be used as basic information regarding the subject of probate. Always consult with your tax preparer and legal advisor regarding questions for your specific situation. This report does not purport to provide legal advice at any level and is only meant as general information.