The FDIC’s take over of several banks this year has depositors concerned and in some cases panicked about the security of their funds. However, the FDIC sticker on the front window of your bank is not the only determinant of your banks financial resilience.
“A depositors first consideration should be the ‘safe and soundness’ of their banking institution,” said Larry Charlton, Senior Vice President of City National Bank in Nevada.
There are several ways to find out about the “safe and soundness,” rating of an institution and the Internet should be your first stop. BankRate.com, assigns a star and numerical Safe and Sound rating to each bank, based on the formula CAEL (Capitalization, Asset quality, Earnings and Liquidity).
The FDIC also offers a list of rating services on their Web site (www.fdic.gov) based upon an expanded formula known as CAMELS (Capital, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk).
It should be noted that the Watch List published by the FDIC should also not be an individuals, sole determinate of a ‘safe and soundness’ rating.
Charlton suggested not only reviewing the bank’s rating before depositing, but also periodically such as before renewing a Certificate of Deposit.
Along with a bank’s rating, there are additional resources a depositor can examine to determine the bank’s “safe and soundness.”
“City National focuses on relationships,” said Charlton “If the consumer has a good relationship with their bank, they will know what’s happening before they have to worry about collecting from the FDIC.”
Charlton added that monitoring a bank’s stock price is also a clue. “If the stock price is decreasing at a more rapid pace than other bank stocks, you need to find out why.”
The FDIC Puzzle
It is commonly believed that FDIC insurance is only covered up to $100,000 of the account balance at each of your different banking institutions, but when you know how to navigate the complexities of FDIC, an individual, through the use of different account types, can get beyond the normal $100,000 single account insurance coverage.
Personal Accounts
• Single account: An individually owned account is insured up to $100,000.
• Joint account: In addition to a single account, an individual depositor may have a separate joint account which will also be insured up to $100,000, for each account holder.
• Self Directed Retirement accounts: Retirement accounts are FDIC insured for up to $250,000.
• Revocable Trust account: A Payable on Death (POD) account is an informal trust account.
• Each approved beneficiary is insured up to $100,000 for each principal on the account. For example, if a married couple has a joint POD account, and has three children, they can deposit $100,000 for each of the children and the account will be insured for up to $600,000.
Business Accounts
• Sole-Proprietorship: this type of account is considered by the FDIC as an individual single account and funds in this type of account are not insured above $100,000.
• Corporate, Partnership and Unincorporated Association accounts: must be for the sole purpose of conducting business and are insured separately from all other accounts.
The idea is to accumulate different ownership types of accounts, where an individual would be listed in addition to at least one other person. Each of those accounts would have its own FDIC insurance coverage.
Charlton emphasized that although knowing how to use FDIC insurance is important, doing your underwriting before you make a deposit is the more important factor.
He cited extremely wealthy individuals who have millions of dollars at one banking institution that is only getting the $100,000 FDIC coverage, but they obviously have enough trust in that bank’s “safe and soundness” to deposit well in excess of that amount.