Saturday, August 30, 2008

Bank Failure -- A Clear and Present Danger

I've been surprised at how many times this quarter the concern over safety of funds on deposit in banks has surfaced in meetings of Chief Executive Boards International. As members regularly observe, funds on deposit in US Banks are insured against bank failure by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. A limit that hasn't changed in my lifetime! Any balance in excess of $100,000 is at risk if the bank fails. Our members are aware of this limit and are, I now believe, justifiably concerned.

Remember also that the $100,000 limit is per individual or business entity. A $100,000 CD and a $100,000 checking account owned by the same person or company are insured only for a TOTAL of $100,000.

Well, after some research into the subject, I've concluded a couple of things -- that it's a far more real danger than I thought and that there are some reasonable strategies by which to protect yourself.

On the real danger side, consider that, per the FDIC:

"On August 22, 2008, The Columbian Bank and Trust Company, Topeka, KS was closed by the Kansas Office of the State Bank Commissioner and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed."

This is only one of 117 unnamed banks (remember, no advance notice is given) presently on the FDIC's "watch list". So, those depositors were all covered for $100,000, right? Right.

And the rest of the story, as Paul Harvey used to say? Beyond that, there were Forty-six Million Dollars on deposit in that bank in excess of the insured funds, that are unlikely to ever be seen by those depositors. It might have been a whole lot more fun for those depositors to have all withdrawn the money in $1 bills, thrown it out in the street, and watched the scramble. Or to have had a huge bonfire, fed by cash. Same result either way. Gone.

Last Friday, another shoe dropped. Georgia's Integrity Bank was closed by the FDIC on August 29 -- the tenth bank failure in the US this year.

Notice that feeling in your gut? I'm betting everyone who had $200,000 or $400,000 on deposit there is wishing they had taken the time to split that up between 2, 3 or 4 banks.

So, that's potential strategy one -- if practical, spread it out between several FDIC-insured banks. With online account transfers available, the delay time transferring funds with no wire transfer fees is usually less than 24 hours. And your standing Line of Credit should be set up to cover you for an overdraft, just in case something gets delayed. 1 day's interest at Prime isn't much to pay for the peace of mind. Here's a place to find FDIC-insured banks offering online transfers and high yields on cash deposits:

Here's a list of six other strategies you might consider:
(none of these are recommendations, and any of them may or may not be appropriate for your situation). One may be available through your own bank: CDARS actually splits your money up among a number of participating banks for you. And apparently handles that somewhat transparently.

------------------------------------------- New Information -------------------------------------
Since the original publication of this post, we've learned of yet another strategy you might explore. Some banks offer "Brokered CDs". This is an idea much like CDARS, only executed directly between banks. Your bank takes your funds in excess of $100,000 and, like a broker, buys CDs on your behalf in other participating banks. They can do this somewhat transparently, and you don't have to shop all over the state to find enough banks. Each of those is then under the FDIC umbrella of the respective bank in which it's invested.

If you have implemented one of these strategies, or know someone who's been hurt by a bank failure, click "Comment" below and share the facts with us.

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Terry Weaver

Chief Executive Boards International

Chief Executive Boards International: Freedom for business owners & CEOs -- Less Work, More Money, More Freedom to enjoy it


  1. Typically bank closures occur on Thursday night without warning giving depositors little time to react. One needs to keep an eye on the Fed's bank watch site, which I don't know. One real problem is the domino effect; a dozen small bank failures bring down a two medium sized banks that brings down a large bank. Lets remember who the FDIC is, taxpayers like you and I or at least the ability to tax you and I.

    I am reminded about someone who told me to put my money in diamonds because they are highly liquid, accepted worldwide, easily transportable without the $10,000 declaration for cash and weigh far less than gold. Plus an ideal transportation method is high quality diamonds set in Platinum jewelry that one wears through airport security, on to the plane and out of the country. The next question is where do you go?Wherever diamonds and platinum are easily exchanged for cash, food, shelter, protection, i.e. a medium of exchange.

  2. Thanks, Terry for the reminder. When you are busy, you just don't think of these things as urgent!...

  3. I learned today of another clean way you can protect your cash reserve funds with FDIC insurance. Some banks offer "Brokered CDs". It's the same idea as CDARS, except the bank does it for you independently. You give them a lot of money, and they parse it out (like a broker) to multiple other banks in increments of $100,000 or less. You get a CUSIP number for all those CDs and you own them. Indy Mac Bank had sold brokered CDs through other banks, and FDIC made good on those (with interest) in about 4 weeks after shutting Indy Mac down.


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