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Blog #5
CAN YOU TAKE THAT TO THE BANK?
By Tom McAllister, CFP™
Is the old saying "The bigger, the better!" a good standard when it comes to banks? With talk of bank failures making the news these days, I thought I'd offer some perspective based on my forty six years' experience in financial planning…
First, what about the size thing? There are 9,443 banks and savings institutions in the United States. Roughly half have less than $100 million in assets, and are considered "small". The top 4,500 banks have more extensive assets, with the very largest 400 banks representing just 4% of all financial institutions.
The vast majority of deposits in the small banks are insured by the Federal Deposit Insurance Corporation. FDIC insurance covers up to $100,000 of each customer's funds. At the other end of the spectrum, the 403 larger banking institutions hold 40% of deposits in uninsured accounts, and the largest 25 banks have more than 90% uninsured. Think about it. The largest banks cater to huge depositors, corporations, governments, etc. They are highly unlikely to fail.
So do financial planners advise clients to avoid banks? Not at all. A good financial plan calls for an emergency reserve account (a "God forbid I ever need it" Fund, if you will). Bank savings accounts and CD's are good places for God Forbid funds. To be sure of FDIC insurance coverage, you can use as many different banks as needed to avoid having more than $100,000 in any one institution.
As a financial planner, I always offer one caution. While it makes sense to shop around for higher interest rates, beware of institutions offering rates considerably higher than their peers (this can indicate the bank is making riskier loans).
Now, about that perspective, courtesy of my four and a half decades of trained observation of the financial landscape… In the big picture of things, bank failures are quite rare. The likelihood of you losing your money in a bank failure is rarer still. Yes, there have been nine bank failures so far in 2008. Only one of these, Indy Mac of California, required bank regulators from the U.S. Federal Reserve Bank to take over the institution. Indy Mac "re-opened" under Federal Reserve conservatorship. Depositors were free to withdraw any and all deposits on the first day. The other eight struggling banks were merged into other banks, and operations went on uninterrupted.
One important function we financial planners offer our clients is guidance when it comes to banking institutions. If there's word of any risky behavior on the part of banks, we usually hear it early.
You can continue including savings accounts and certificates of deposits in your overall investment and money management plan. I'll continue to offer advice and perspectives in my "One Man's Opinion" newsletters and in these "Making Cents Out Of The News" blog posts. And, yes, you can take that to the bank!
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