Bank Failures: Should You Be Worried?

Bernanke says some smaller banks could go under. What happens if yours is among them?

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Housing and credit problems are threatening to touch off a troubling new trend: an increase in bank failures. As the banking industry braces for higher loan losses, the Federal Deposit Insurance Corp.—which guarantees accounts at more than 8,500 banks and savings associations—has recently increased its tally of "problem" institutions by more than 50 percent, to 76, from the year-earlier period. Meanwhile, the agency is working to bring 25 officials—who served during a wave of bank failures in the savings and loan crisis of the 1980s—out of retirement.

The FDIC's moves come weeks after another bank regulator, Comptroller of the Currency John Dugan, predicted "an increase in bank failures" in the coming months. Federal Reserve Chairman Ben Bernanke expressed similar concerns in congressional testimony last week but noted that while certain smaller banks—especially those concentrated in real estate lending—could go under, the nation's banking giants face less danger.

Should I be worried about my bank failing?

For the most part, the answer is no, partly because it is nearly impossible to spot a failing bank, says banking consultant Bert Ely. "Almost no one should try to figure out whether or not their bank is going to fail. What they should do instead is to make sure their deposits are insured," he says. How do I know if my deposits are insured?

The Federal Deposit Insurance Corp. insures up to $100,000 per depositor at banks and savings associations. (In some cases, such as with certain kinds of deposits in retirement savings accounts, it insures more.) That means that if a bank goes under, Uncle Sam will give you your money back. Of course, the money is protected only if it is in an actual bank or savings association that is registered and insured with the FDIC. Some institutions, including fraudulent ones, call themselves banks but are not actually registered as such. To make sure your bank is FDIC insured, look it up on the FDIC's institution directory or call the FDIC's consumer hotline (1-877-ASK-FDIC). David Barr, FDIC spokesman, says that consumers who use the Internet to search for competitive interest rates on savings accounts and come across an unfamiliar bank should first check to make sure it is FDIC insured. "These days it's easy for criminals to set up a website to try and trick consumers into turning over money to them," he says.

But I have more than $100,000 in my bank account. Will it be protected?

Consumers with more than the insured amount in their savings accounts should spread it around among different banks, advises Ely, since only $100,000 will be insured at each institution. (To be safe, put $95,000 in each account, to protect any interest that accrues.) But don't make the mistake of putting money in different branches of the same bank; to be protected, it has to be deposited at different banks. The FDIC offers a calculator that lets users figure out their insurance coverage by entering their account information.

Are my investments insured?

No. The FDIC does not insure investments, even those in retirement accounts and even if they were bought through an insured bank. If my bank fails, how long will it take for me to get my check from the FDIC?

According to the FDIC, it usually makes insurance payments within a few days of a bank's closure, either by check or by deposit at another bank. How often do banks fail?

There has been only one bank failure in 2008 so far—the tiny Douglass National Bank in Kansas City, Mo. Douglass is the fourth bank failure since February of last year. Before that, federal regulators hadn't closed down a bank since June 2004. How many banks are expected to fail?

"It's our view that regulators are expecting 100 to 200 banks to fail" over the next 12 to 24 months, says Jaret Seiberg, a research analyst for the Stanford Group. Seiberg expects those failures to occur predominantly in states like Ohio, Michigan, California, and Georgia—where the construction lending market, which includes residential real estate, is expected to weaken dramatically.