Bank Failure -- A Real and Present Danger

As most members are aware, funds on deposit in US Banks are insured against bank failure by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. A limit that hasn't changed in my lifetime! Any balance in excess of $100,000 is at risk if the bank fails. Our members are aware of this limit and are, I now believe, justifiably concerned.

Remember also that the $100,000 limit is per individual or business entity. A $100,000 CD and a $100,000 checking account owned by the same person or company are insured only for a TOTAL of $100,000.

Well, after some research into the subject, I've concluded a couple of things -- that it's a far more real danger than I thought and that there are some reasonable strategies by which to protect yourself.

On the real danger side, consider that, per the FDIC:

"On August 22, 2008, The Columbian Bank and Trust Company, Topeka, KS was closed by the Kansas Office of the State Bank Commissioner and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed."

This is only one of 117 unnamed banks (remember, no advance notice is given) presently on the FDIC's "watch list". So, those depositors were all covered for $100,000, right? Right.

And the rest of the story, as Paul Harvey used to say? Beyond that, there were Forty-six Million Dollars on deposit in that bank in excess of the insured funds, that are unlikely to ever be seen by those depositors. It might have been a whole lot more fun for those depositors to have all withdrawn the money in $1 bills, thrown it out in the street, and watched the scramble. Or to have had a huge bonfire, fed by cash. Same result either way. Gone.

Last Friday, another shoe dropped.  Georgia's Integrity Bank was closed by the FDIC on August 29 -- the tenth bank failure in the US this year.

Notice that feeling in your gut? I'm betting everyone who had $200,000 or $400,000 on deposit there is wishing they had taken the time to split that up between 2, 3 or 4 banks.

So, that's potential strategy one -- if practical, split it up between several FDIC-insured banks. With online account transfers available, the delay time transferring funds with no wire transfer fees is usually less than 24 hours. And your standing Line of Credit should be set up to cover you for an overdraft, just in case something gets delayed. 1 day's interest at Prime isn't much to pay for the peace of mind. Here's a place to find FDIC-insured banks offering online transfers and high yields on cash deposits: http://www.bankrate.com/

Here's a list of six other strategies you might consider: http://www.bankrate.com/brm/news/sav/20080827-insure-excess-deposits-a1.asp
(none of these are recommendations, and any of them may or may not be appropriate for your situation). One may be available through your own bank: http://www.cdars.com/. CDARS actually splits your money up among a number of participating banks for you. And apparently handles that somewhat transparently.

Please let us know of other good ideas you have that might be useful to other members.   

Thanks,  
  

Terry Weaver
CEO
Chief Executive Boards International
TerryWeaver@ChiefExecutiveBoards.com
www.chiefexecutiveboards.com
www.chiefexecutiveblog.com