Bank Failures Have Customers Wondering About FDIC Protection

By Jeff Plungis
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Aug. 8 (Bloomberg) -- As U.S. regulators brace for more bank failures, consumers are wondering for the first time since the savings-and-loan crisis of the 1980s about the safety of their money.

Harry Newton, a former publisher who lives in New York City, moved $604,000 in cash to seven different banks last month after the seizure of IndyMac Bancorp Inc. to ensure that his funds were covered by the Federal Deposit Insurance Corp.

In all, eight banks have been closed in 2008 by state and national regulators amid record losses tied to the collapse of the subprime mortgage market, data compiled by the FDIC show.

``I'm worried about the banks that failed this year,'' said Newton, 66. ``Some of them weren't on the FDIC watch list. I believe there are billions of dollars of assets on balance sheets that haven't been written down yet.''

FDIC insurance covers deposits up to $100,000 per person. Joint accounts are covered up to $200,000. Individual Retirement Accounts, if they're invested in bank products, not stocks and bonds, are insured up to $250,000.

There are steps you can take to have even more money covered. Naming immediate family members as payable-on-death beneficiaries may raise insurance limits to as much as $800,000 according to the FDIC. With so-called brokered certificates of deposit, as much as $50 million may be protected.

What Happens

In most bank failures, the FDIC lines up another bank to assume the deposits, usually by the next business day. That's happened seven of eight times this year -- all except Pasadena, California-based IndyMac. In these cases, depositors can withdraw as much money as they want at their branches.

When the FDIC can't find a bank to assume the business, it refunds insured depositors directly. Federal law requires these payments ``as soon as possible,'' and the agency tries to send out checks within two business days after the bank closure, according to a brochure written for consumers.

It's easier than ever to exceed the FDIC limits without realizing it, since banks offer multiple products that aren't covered, including mutual funds, annuities, stocks and bonds. The protection is for the individual, for the total of all the insured accounts. It's not for each account.

Financial adviser Kevin Young of Davis, California, had a client with $4 million at a single bank earlier this month, most of it uninsured. The owner had been wrongly told by the bank it was protected because it was in a trust. He helped the family move it into brokered CDs through TD Ameritrade Holding Corp.

``Sometimes people who work at the bank don't know this level of detail,'' Young said. ``I always say get it in writing. Don't take their word for it.''

Other Options

For those seeking insurance over the normal FDIC limits, banks in the Promontory Interfinancial Network LLC will split up a large CD among several banks to stay under the cap. The Arlington, Virginia-based company has been offering this service, known as a certificate of deposit account registry service, or CDARS, since 2003.

Promontory network banks would divide $1 million among 11 different bank CDs, according to company spokesman Phil Battey. Each CD would be less than $100,000 to make sure any interest earnings are also insured.

Promontory's network started with a handful of banks, enabling up to $250,000 in insured CDs. Five years later, 2,170 banks are in the network, and savers can insure up to $50 million through a single bank.

A 2003 legal opinion from the FDIC assures CDARS customers that they'll be treated like any other insured bank customer, Battey said. Three of the banks that have failed this year were part of Promontory's network. In each case another bank assumed CDARS deposits immediately, making payouts unnecessary.

Low Yields

None of this addresses whether it's a good idea to have that much money tied up in low-yielding bank accounts, when there are safe, higher-paying alternatives like bonds and mutual funds. Young, the financial planner, says his fixed-income customers usually opt for municipal bonds or U.S. Treasuries.

IndyMac was the fifth U.S. bank to fail this year, and three have failed since. Three went out of business last year, after a rare lull of two and a half years without a U.S. bank failure.

More may be on the way. The FDIC's watch list of troubled banks numbered 90 at the end of March, up from 76 in the previous quarter. It's likely to grow later this month, when the agency releases a report on industry finances for the second quarter.

The FDIC will add up to 138 staff members to handle the caseload, said agency spokesman David Barr. The number of banks failing is still relatively small compared with the U.S. savings and loan crisis. In 1990, the FDIC watch list had 1,496 banks. That same year, 169 banks and 213 savings and loans failed.

Bankrate.com offers ``safety and soundness'' ratings for U.S. banks, using measures like earnings and asset quality to measure financial strength. More readers are checking the Web site for the ratings, said Greg McBride, senior financial analyst with the North Palm Beach, Florida-based company.

To contact the reporter on this story: Jeff Plungis in Washington jplungis@bloomberg.net.