Tuesday, February 12, 2008

Bank Safety matters more now than ever!

It is more important now than any other time since the Great Depression to pay heed to the safety ratings of the bank where you have deposited cash. A recent article by Reuters outlined how dozens of banks will fail by 2010. During the past 3 ½ years only 4 banks collapsed, this rate is about to go up drastically; this number is expect to increase to near 150 over the next couple of years. Some surveys expect even greater numbers.

Smaller banks with under a couple of billion dollars in assets are most at risk; however the problem could easily spread to larger institutions in a scenario with severe economic and real estate declines.

Fortunately there are services available that allow you to determine the safety rating of your bank. The FDIC website has a listing of the major services. Two of the leaders are Weiss and Veribanc. Both offer information via phone and the web for a fee. The good news is that many local libraries have subscriptions to their information, so it only requires a trip down to your local public library to research the information for free.

Investors should always check out the rating information for a bank before placing cash at the institution. Getting the latest information is especially important in this era of souring real estate loans. It is also important to keep your total deposits at a bank under the FDIC limits so you are insured.

In another interesting note, FICO scores are being overhauled. In an age where the importance of these scores has risen; their ability to determine credit-worthiness has plunged – to the point where FICO scores are almost meaningless. Fair Isaac Corp is promising to completely radically overhaul its methodology to provide a more predictive stat. It is an open question if this will help the lending community. Most industry pundits believe that an altered FICO scoring system would not have stopped the loose lending standards at banks that led to the subprime meltdown.