Fallout From the Credit Crisis: How Safe is Your Money?

The credit crisis that began in 2007 has damaged the financial condition of many banks resulting in bank failures such as NetBank and near failures such as Countrywide Bank. Bank ratings are expected to slip in 2008 as the effects of the credit crisis continue to reverberate through the economy. There have been 28 bank failures in the United States since October 1, 2000. During the savings and loan crisis of 1988-1989 there were more than two bank failures every business day.

Every organization that ever has over $100,000 in its bank accounts must be concerned about the possibility of failure. This includes all accounts held at one institution, which includes all branches, accrued interest and also un-cleared checks. The Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) administer this guarantee program. If an institution actually fails and the FDIC or NCUA become involved any amounts in excess of $100,000 may be subject to loss. The recovery of the amounts in excess of $100,000 depends on the remaining assets of the institution and the claims of various creditors. For brokerage accounts there is Securities Investor Protection Corporation (SIPC) insurance on account balances up to $500,000 in securities but limited to $100,000 in cash.

Some institutions maintain additional methods for safeguarding excess balances. In some cases additional insurance may be available. One thing to be aware of is that some excess balance insurance has an overall institution limit. For instance some brokerages purchase insurance in excess of the SIPC limit of $500,000 but this insurance is limited to an overall claim limit by all account holders of that brokerage.

A common method of safeguarding amounts in excess of the insured balances is for an institution to collateralize the account. This involves the institution holding government securities that are tied to your account. In the event of problems those securities are intended to serve as a guarantee for the account balance.

Fortunately there are easy ways to research the financial standing of your bank. The FDIC maintains a website, www.fdic.gov, that provides free summary information on all insured banks. The National Credit Union Administration, www.ncua.gov, provides similar information for insured credit unions.

The bank comparison site BankRate.com, www.bankrate.com, has a free summary rating called Safe & Sound®. Another site with more detailed analysis is BauerFinancial, www.bauerfinancial.com, which has a free summary rating and also offers more detailed analysis for a small fee. For publicly traded banks a great deal of information is available on the company website and at financial websites. Of course your banker would appreciate a chance to discuss the matter with you as well.

We suggest that your organization adopt a written policy to review its deposit and investment relationships for safety at least annually.

If you have any questions please call Bruce Mayer, CPA at (608) 442-1939 or email at bruce.mayer@wegnercpas.com.