Is Your Bank Safe?

This week, a friend expressed concern to me about the safety of his bank. So today I'm addressing two questions: how can you find out whether your bank is in good financial shape, and just how strong is the FDIC's insurance fund?

My initial response to this question is that bank accounts are insured by the FDIC for $250K or more, depending on how the accounts are configured. But my friend pointed out that his bank is one of the largest banks in the US. If it’s “too big to fail,” he asked – what happens if it does fail?

What he really wanted to know was the financial strength and soundness of his bank. The source I prefer for bank ratings is the Weiss Ratings service. The basic Weiss ratings are available for free, though you may have to register at the site to search for your bank.

The Ratings

I find Weiss preferable to, whose ratings seem unduly optimistic to me. For example, take the four largest banks in the US: Bank of America, Wells Fargo, JP Morgan Chase, and Citibank. The table below compares Bankrate’s Star ratings for these banks with Weiss’ ratings.

Bank Name Bankrate rating Weiss rating
Bank of America 4 stars D+
Wells Fargo Bank 3 stars D
JP Morgan Chase Bank 3 stars D
Citibank 4 stars C

In Bankrate’s system, 5 stars means “superior,” 4 means “sound,” and 3 means “performing;” in Weiss’ system, ratings in the C range means “fair,” while institutions in the D range are “weak.” Weiss uses + to describe the top third of a grade range and - for the bottom third.

Weiss takes a dimmer view of the strength of these banks than does. Interestingly, Weiss was apparently the first US ratings agency to downgrade US debt, putting it at the lower end of the investment-grade range. Weiss also provides a list of the highest- and lowest- rated banks and thrifts that it covers.


Having looked at the ratings of the largest banks, I began to wonder: how strong is the FDIC insurance fund right now?

In the aftermath of the financial crisis of 2008, the FDIC’s insurance fund went into negative territory, ending 2009 at negative $20.9 billion. According to the FDIC’s May 2011 report, the insurance fund was built back up to negative $1 billion at the end of the first quarter and was expected to return to positive territory by the end of June 2011. So what might the FDIC be able to handle if one of the “too big to fail” banks got into trouble, keeping in mind that the three largest US banks have deposits on the order of $1 trillion each?

In the largest bank failure in US history, the assets of Washington Mutual (deposits of $188 billion) were sold to JP Morgan in a deal that enabled the FDIC to avoid paying anything from the insurance fund. In July 2008, the largest single drawdown of the insurance fund to date came from the failure of IndyMac Bank, a bank with about $19 billion in deposits and $30 billion in assets. Its collapse cost the insurance fund $8.9 billion.

FDIC Borrowing

In 2009 Congress passed legislation enabling the FDIC to borrow up to $100 billion from the US Treasury at the FDIC’s own discretion and permitting borrowing of up to $500 billion if the Treasury, the Federal Reserve, and the President all agree that it’s necessary. At the end of 2010, the FDIC was insuring about $6 trillion in deposits, so its $500 billion “line of credit” represents a much larger chunk of the insured deposits than the FDIC is technically required to have.

Although the FDIC’s web site suggests that its insurance is backed by the “full faith and credit” of the US, the site also contains a letter from its legal counsel indicating that there is no law binding Congress to back the FDIC with the full faith and credit of the United States. So the $500 billion Treasury line is the “official” limit unless Congress acts to change it. So, the question seems to be: might the FDIC ever need more than $500 billion to cover losses from a bank failure?

The failure of an enormous bank could render even that amount inadequate, and we’ve learned to believe in the improbable in the last few years. If all your deposits are with a behemoth bank and you’re anxious about a failure, what should you do? Rather than staying awake at night, I'd say that you should either divide your deposits among a few banks, or shift your money to one of the strongest institutions, where a failure is much less likely.

About the author

Thomas Fisher, CFP®

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