Ask the Readers: Choosing a Bank During the Credit Crisis?
Published on - October 3rd, 2008 (by J.D. Roth) The more the credit crisis spreads, the more it affects the average person. Kristen wrote last week looking for advice. She’s not in a panic, but she is wondering what she should do:
I wanted to ask your thoughts on the recent seizure and sale of Washington Mutual. All of my accounts are at WaMu, including my 3.75% APY online savings account, and my 4.5% APY 12-month CD. I think these are great rates for what I have, and in comparison with what other banks are offering.
Now that WaMu is part of JPMorgan Chase, should I look elsewhere for accounts with good interest rates? Frankly, what I’ve seen of Chase bank’s rates, I’m not very impressed. I also can’t find other banks with comparable rates, but I’ve only started looking. I’ve enjoyed having all of my accounts wrapped up conveniently in one bank — checking, savings, CDs, and we just opened our kids’ savings accounts there as well.
Are the days of doing all my banking and saving with one institution a thing of the past? How can I choose a good institution without fear that it, too, will fold in six months? Or should I just stay put?
I’ve been wondering the same thing recently. None of my money is with banks that are in trouble, but I do have it spread out in three different places: one bank has my business accounts, one bank has my long-term savings, and a credit union has my day-to-day accounts. This seems goofy, especially considering my quest for simpler, more automated finances. Still, this system works right now, and is mostly automated, so I’m happy with it.
I also talked with my cousin Nick earlier this week. He’s always had his money with Washington Mutual, but he wants to move it now — not because he’s worried about losing it, but to “vote” with his dollars, to show his disapproval. He, too, wants advice on where to put his money.
A couple of quick thoughts for Nick and Kristen:
- If you’re worried about the safety of your savings, familiarize yourself with FDIC protection. (Or NCUA protection, if your money is in a credit union.) To determine the stability of your financial institution, consult Bankrate’s Safe & Sound ratings.
- I’m no advocate of “rate-hopping”, but I do feel it’s a good idea to check once in a while to see what the current top rates are for high-yield savings accounts. My long-term savings are currently with ING Direct, and I don’t intend to move it without a compelling reason. (Though if ING Direct were in trouble and taken over by another bank, that might prompt me to move!)
Surely many Get Rich Slowly readers have faced similar decisions lately. What choices are you making? How do you pick a bank in the current financial environment? Is it something to even worry about if your deposits are less than the FDIC limits?
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Honestly…what is going on … the Govt meets at these late night sessions as if they are cramming for a test… are we to pray or pay… all week on myinvestorsplace.com we have been chatting …fretting…discussing…what to do… and still no one really ones… what does the layman as well as the professional need to do in these times…save money…cut back on debt.. PRAY..what do we need to do???
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JD,
One small overlooked fact in this economic mess is that your small local community banks are not being affected to the degree the large,national banks are.
Credit unions, and small banks, are very safe places. And they have better customer service to boot
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The choice of bank is being made easier for us, because of all the consolidation being done in the banking industry. You are going to be able to do EVERYTHING at on bank. So there are pros and cons. Pros is that because of consolidation you will have a bigger network to access your accounts (ever hate the fact that your bank didn’t have ATMs in a city? not anymore). Another pro is the strongest of the fittest. The cons are that there are and will be too few banks to make things competitive for the short term. another con is now we have a handful of banks with all of our deposits making them huge monsters in the too gigantic to fail (e.g. citi would be #4 in country list with over $2.6 trillions value and that is at its current discounted value).
choose a bank that is FDIC insured, although that isn’t necessarily a guarantee in these times. Choose a bank that meets your needs, that has branches and atm’s in your primary use area if those are features you are looking for.
whether Kristen should leave wamu not that it is Chase, is up to her. Chase is honoring wamu’s cd’s, but that will only last beyond the transition period. since cd’s are insured, and if it is a high rate cd, why move it? I would lock in cd’s at their high rates now, because once banks start lending to each other again, we will be back to the low interest rates until the fed starts increasing rates again.
i wouldn’t over think this though. I would be more concerned about putting money in small to mid sized banks at this point, though.
as far as Nick is concerned, what does voting his disapproval mean? Is he removing his money because he disagrees with JPMorgan Chase buying wamu branches and deposits? that doesn’t make sense to me, because wamu was going to go down anyways. At least now Nick has a wider network to access his money and has a good company holding his deposits. Would he rather lose everything, because FDIC did not have sufficient funds to cover wamu deposits? Don’t get what disapproval means. Besides, JPMorgan/Chase, Citi, and Bank of America are gargantuan companies now. Good to stand on principle I guess when it doesn’t matter. I threatened to pull my assets from Bank of America because of their error over $250 (they owed me $250 but refused to pay), and they couldn’t care less that I was threatening to pull over $150k. I pulled it, and they still didn’t care.
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If you find yourself in the extremely rare case of your bank going under without a buyer, yes your money is insured, but its a matter of where you get your cash while you wait for the FDIC to cut checks. IS your credit card also through your bank? Will it still work.
So the real question is can you survive without cash from the moment the bank closes to your first paycheck. (Keeping in mind that with all the bad reports lately no bank has just closed its doors.)
I am extremely conservative by nature, so my wife and keep separate accounts so that we are diverse in our banking as well. It also allows us two options when shopping CDs without opening new accounts.
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Something to keep in mind, banks offering the best rates of return are usually those most in need of deposits. If the bank is desperate for deposits, it is probably not in very good financial shape itself. Not that there’s anything wrong of taking advantage of opportunities to make decent interest on your money, but don’t be too surprised if the banks with the best rates are those that fail next. As long as you keep your deposits below the FDIC limit, you should be fine.
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I have my money in a credit union in my local community. I’ve had an account with them for decades. Probably not the highest rates I could get, though they aren’t bad, but I feel like my money is being put to work here where I live. The other nice thing is, if they start acting nutty, it’ll make the local paper and you have a good chance of finding out (one place I used to do business with was talking about opening a branch on the moon–I was not surprised when they didn’t make it through the savings and loan crisis). Also, if you want to save money, going to a bank with an ATM on every other corner is not good.
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I’m going to be switching to a small local bank which I found using http://www.checkingfinder.com. Many of these banks have better rates for checking accounts than the big online savings accounts. I’ve been using BofA for a long time but I don’t like what I’ve seen in the big bank space lately.
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I’m actually switching to a credit union, but not because my bank is in danger. No, it’s because they sent my debit card to an address where I haven’t lived in several years, after they sent my husband’s to the correct address, mind you, and when I expressed surprise and concern about the fact that my card was sent to, you know, strangers, were incredibly rude.
So bye bye TCF Bank!
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Our checkings accounts are at WaMu. The reason we’re moving them is because we went to WaMu from Chase, who is notorious for sending the phone-bank calls to your primary phone at least once per week to hard-sell home equity loans, credit cards, or whatever the banking flavor of the week is. So I don’t do business with Chase anymore.
We’re in the process of moving our accounts to the local credit union. You’ll find that their fees are lower, the interest rates are higher, the advertising is nonexistent, and so far the only phone calls I’ve received are from the person that actually works at the credit union, making sure that I’m satisfied with their customer service. What a concept!
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I recently moved all my accounts from Wachovia to Navy Federal Credit Union. I already had my mortgage and a savings account with them, now everything is in one place. It also helped that Wachovia tried to charge me $160 in fees for a mistake they made.
With the credit union I can make my mortgage payment as a simple online transfer between two accounts, just like moving money from checking to savings. Same goes for the unsecured loan I took out even more recently to pay off my two vehicles in case I want to sell one. I don’t know what this ‘credit crunch’ is that everyone else seems to be worried about. My bank just gave me $25,000 with no collateral at a decent rate just because I asked.
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“Though if ING Direct were in trouble and taken over by another bank, that might prompt me to move!”
Are you honestly saying you’d participate in a bank run, J.D.? What is this, the 1930s?
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Hm. No, that’s not what I really meant, Andrew. I like ING Direct. If another bank bought them, it would be unlikely that the same policies would remain in effect. What I mean is that, like Nick and Kristen, if my bank changed hands, I, too, might find myself looking for a new place to put my funds.
Even that isn’t very clear. I’m not talking about panicking, but about my reasons for choosing a bank.
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I switched from Chase to a local credit union this summer. It started with getting a savings account with ING (which I learned about here, thanks JD). Once I compared the amount of interest I was getting, and realized that since Chase’s minimum in savings accounts to avoid fees was $300, they were basically holding that money “hostage,” and giving me pennies for it each month, just so I could avoid “fleas.”
So I checked through all the credit unions and banks in my area online for what they offered. I found a local CU that had a $5 minimum for their savings account, so I could throw the rest in ING and accumulate more interest.
Through all of this, I also compared the ratings with Bankrate.
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I am glad to see such informed readers J.D. I agree that most local/community banks are not being affected by this mess, but you cannot make that assumption. Please check out bankrate.com and look at the safe & sound ratings of your bank. In my opinion safety is more important than rate right now. I want to bank with someone that has made smart, conservative decisions over the last 18 months. Those are the banks that will make it through these hard times.
Also remember if a local bank is paying a really high CD special, there is probably a good reason for it. They might be buying deposits due to some bad loans.
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In response to your comment: “Is it something to even worry about if your deposits are less than the FDIC limits?”, readers might be interested in an article yesterday on The Economist’s website entitled “A Useful Fiction”, regarding the false sense of security provided by the FDIC. There’s not enough money to go around…
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I have a question that I haven’t seen addressed. I have a settlement from an accident I was in years ago that has an annuity pay out – several thousand dollars every few years.
This money is not flexible, and it’s in a life insurance vehicle at a company like Metlife. Is this money still safe?
The readers here are so smart I thought I’d ask around here.
Thanks for any info!
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I also have my savings and CD’s at ING Direct is so easy and the rates are higher than most places. As far as my checking account and loans I went to a credit union. Right now I am getting 5.10APY on balances under 25,000 in my checking. Which happens to also be their free checking (First Community Credit Union) Who would leave that much money in their checking account…I have no idea but they rate is very NICE
a extra 10-20 bucks a month in my checking account makes me very happy.
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I just moved a lump sum from ING to Chase.
Yes, both are FDIC insured up to 100K (which I’m well under) but if the congress fails to pass the bailout bill today (I hope this scenario comes to fruition) things may get a lot worse. I have local access to Chase, can’t say so for ING. If I need to get my funds right away, at least thats an option at Chase. Plus if things turn out okay I can just transfer the money back.
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@John M: yes, the economist is right and wrong. If WAMU went under without a buyer, the FDIC did not have sufficient reserves ($48b) to cover WAMU’s deposits of $182b. Of course, the govt probably would have stepped in if it hadn’t gotten JPMorgan/Chase to step in. Hopefully, there will be some stability and banks start lending to each other again soon. If not, I think people are way over selling FDIC’s ability to insure assets. AIG was supposed to provide insurance as well, and it too failed, although the FDIC has the unlimited printing press of the USG.
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@NC, who is paying the annuity and who is the company that was sued? Chances are your annuity has nothing to do with the current situation. I’m a little confused, though, is the annuity paying into a life insurance vehicle or are you getting cash from it? If it is going into a life insurance, I’d be seeing what I could do to just get the annuity in cash.
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I had lost confidence in my bank reading news articles that said it was ‘circling the drain’.
I had always banked at a small local bank until it was purchased by the larger regional bank. So, I went to bankrate and looked at other local banks and choose the one with the best ratings which friends have had good customer service experiences with.
The bank I choose it quite traditional. They have been around since 1925 and I figure if the bank made it through 1933, it will make it through this.
I am not getting nearly as good interest. However, right now the peace of mind I have is worth the lower interest rate.
Funny thing. The banker who set up my accounts said it was a busy day with lots and lots of people setting up accounts and leaving the larger, less steady banks.
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To echo what John M said, I’ve seen a lot of people pointing to the FDIC and saying that our deposits our guaranteed, and I think this oversimplifies things. The FDIC has something like $45b to guarantee $8-9t in deposits. Widespread bank failures over a short period would wipe that out quickly. I’d expect that you’d eventually get your money back, but it could take longer than the couple of days it’s supposed to take.
I’m not saying people shouldn’t trust banks, I’m just saying that they shouldn’t be naive about the FDIC under current circumstances. Having money in more than one bank is a very good idea (I agree with the recommendation to use a local credit union, especially for your day-to-day account).
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The best reason to choose a small, local bank or credit union is that they invest directly in your community, bolstering the local economy. Money that circulates within a community makes it stronger; local banking is one of the ways we can build resilient communities in times of stress (as well as in times of plenty).
We banked with WAMU because they bought out the small local bank my husband banked with and we just never bothered changing. Now that we’re trying to keep our money local (by buying local products) and WAMU is now Chase, I think we’re going to look more closely at our locally-owned banks.
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I agree with John M on the false sense of security being trunpeted from the top re: FDIC protection. The truth is that if a large bank or many small ones take a nose dive at the same time, there are not enough FDIC funds to go around. Even if there are, you still have to survive until the check arrives. This is why I have my funds diversified. Our mortgage is with one bank, checking account with another, kids savings with a local CU, I have my own money market account with a fourth institution, savings with another and we maintain our account in the UK where we come from. I have recently checked out all of them on the Bankrate Safe and Sound scale and they are as solid as possible at this time.
Yes, it’s a lot of paperwork, but I don’t believe in putting all my eggs in one basket and at this present time diversification seems to be our only protection, not only in investing but in banking too!
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wendy.. 5.1% apy for a checking acct??? i have never heard of that before EVER! that’s a good deal
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anyway.. i’ve had my checking acct. with B of A for over a decade.. which i don’t think is going anywhere soon
ING for savings like most of us here.. is there any news about ING direct? are they doing okay?
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I’m not planning on moving, although my current account is with Halifax which is a British bank in trouble (in much the same position as WaMu or Wachovia I guess). I’m not planning on moving unless I have to.
When I do, I’ll look for a good rate, with a local branch, telephone and internet banking, and left-handed cheque books. Any bank that fits those criteria is also insured as it happens.
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About the 5.1% apy for a checking, that’s a reward checking account. These do have high yields but require around 10 debit card purchases a month. They also have a few other minor requirements to qualify for the high yield. If you don’t mind these requirements, they’re not a bad deal. The website http://www.highyieldcheckingdeals.com/ lists 100′s of them.
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My accounts are with Wachovia, and based on my past experiences w/ Chase, I had no intention of sticking around. Now that Wells Fargo is buying them, based on my mother-in-law’s experiences with WF, I have no intention of sticking around.
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I’m leaving everything as is for now. I have all savings and main checking at ING and I have business checking & a small personal checking at a small local bank. I really can’t do much in this situation. I’m not about to keep my savings laying around my house.
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A brief replay about FDIC insurance
The FDIC has NEVER not paid out for any insured deposit. While the times are turbulent, there is zero reason to believe that the FDIC’s insurance of bank deposits is anything but completely safe.
Don’t over-use hyperbole
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Just a few months ago I closed 2 checking and 2 savings accounts at Wells Fargo, and opened an ING savings and a checking at USAA Federal Savings Bank. I’ve been dissatisfied with Wells Fargo for many years, but they had taken over my bank (Norwest), and enertia kept me from moving, even though their attempts to “fee me” were rampant.
The final impetus to change was when I deposited cash at the WF ATM, and somehow $100 went missing from the SEALED envelope from when I withdrew the money from the bank across the street. (This was when my husband was in Iraq — juggling joint finances is quite a challenge when one of you is in the middle of a war zone!)
I have had multiple car loans with USAA FSB(current and past), and currently have a brokerage account. I can’t say I like everything about their online checking structure, but USAA is HANDS-DOWN THE BEST bank I have ever dealt with from a customer service perspective. Stability-wise, USAA seems to be a good choice right now too — They don’t offer mortgages (just home equity loans/lines). (You do not need to be military to bank at USAA FSB.)
Despite my general confidence in USAA FSB, the bank troubles have caused me to reconsider if keeping all my money nonlocal is wise. I am considering opening an account at the local credit union my husband banks at. (Alternatively, I may create a link between my husband’s or son’s accounts to the online banks to provide a conduit for money transfer.)
I don’t necessarily think that “local” means without risk — poor financial decisions can be made by large and small corporations, and small companies generally can have a lot less liquidity cushion to recover from poor decisions.
I echo the question from kick_push about ING. I’d like some information on their stability, but have seen nothing. And they do offer mortgages.
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Those of you in the U.S. using a credit union need to make sure it is using federal (NCUA) insurance as the primary (up to $100,000) insurer.
Don’t do business with any credit union that uses a state insurance fund as primary – several years ago some depositors had to wait over a year to get their money back when a state insurance fund failed in Rhode Island.
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What a great article! I was wondering the same thing since I have checking/savings and a 401K rollover at WaMu. I am considering leaving my checking/savings there temporarily but moving my 401K rollover to Fidelity since I have other investments with them already. I will definitely be researching local banks in the near future…thanks to everyone’s great comments! Any suggestions other than Fidelity for a 401K rollover?
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@KMR: What do you mean USAA doesn’t offer mortgages? http://usaa.mortgagewebcenter.com/Default.asp
money is held electronically, so i’m not sure what the insecurity of money being held nonlocally means.
if you have a brokerage account with USAA, you might look into Asset Management Account with the tax-exempt money market fund.
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In California S&Ls are in as much pain as anyone else. Why wouldn’t they be? They provide loans on homes, cars, boats and etc and survive based on the employment of their clientele. With an unemployment rate of 7 percent in CA, and the lack of borrowing power between banks (a very big issue), I would expect to see a lot of merging into the larger banks.
In fact, the Credit Union that I was a member of for 8 years was just bought by Wells Fargo. And my credit card company was bought by BofA. I don’t like either, as they seem to exist by bleeding their depositors with an assortment of small fees. Further, they were both instrumental in increasing ATM fees as a means of consolidating their client base.
So, I moved all of my accounts to Etrade Financial (IRA, personal brokerage, checking and savings). That was a costly mistake. The Etrade service department seems to be run by the same teenagers that punch in you hamburger requests at McDonalds. Actually, that isn’t fair, McDonalds gets my order right every time.
So, I moved all of my investments to TDAmeritrade and my checking and savings to Wamu. I liked Wamu a lot. The staff was as knowledgeable and concerned as that of the little S&L that I used to patronize.
I know nothing of JP Morgan Chase, but I see two posters above have both not liked the sales pitches they receive at home. I will not put up with that!
As a note, it has been stated several times lately that if your bank is offering unbelievable interest rates, then most probably, they have issues. (This doesn’t apply to online banks that can pass on savings by not having a bricks-and-mortar storefront. Just make sure they are FDIC secure).
jegan
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I read an interesting article about protecting your cash a few weeks ago in WSJ.
There are some very easy ways to increase your FDIC (or NCUSIF) coverage without opening accounts at different banks
1) Modify your accounts to be joint ownership or certain types of beneficiaries. This generally increases coverage $100k per person (e.g. my wife an my account at the credit union, being jointly owned, is covered for $200k).
2) If you use a bank, see if they participate in CDARS. Essentially, the program invests money from your bank account into CDs at other CDARs institutions, making sure you don’t have $100k in any one place
3) Buy brokerage CDs through your brokerage accounts. A large brokerage, such as Fidelity or Vanguard, will buy extremely large CDs from a bank (in the millions of dollars size). You then buy chunks of those CDs for yourself. Your CDs at a single bank are protected up to the $100k limit, so you just have to pay attention to which CDs you buy.
The major upside to both CDARs and brokerage CDs is convenience: you still just get the one statement and don’t have to run to banks all over town. The major downside to both is that you won’t get the very best rate out there. However, as has been noted, the very best rates are often associated with troubled institutions.
Of further interest, the bill passed today will increase FDIC and NCUSIF coverage from $100k to $250k. It’s only good until 2009. The last increase in coverage was also a 250% increase (from $40k to $100k in 1980), so maybe the $250k amount will end up being permanent.
As pointed out, FDIC is running a little low on cash this year, but they have unlimited borrowing capacity from the gov’t. No one has ever lost a dollar of insured money in either the FDIC or the NCUSIF.
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I have been a Wamu customer for 5+ years, but have been meaning to switch to a local credit union for philosophical reasons for the past 6 mo. I’ve been avoiding the hassle of switching, but the recent buy out of Wamu gave me the added incentive. I am not concerned about the money in my Wamu account, I just like the principals of my new credit union much more (plus, it pays 7.71% for the first $500 in checking, which is an added incentive).
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This question reminded me that about 15 years ago I had a string of banks get bought out or go under. It was just weird. I’d have an account with one bank then later, it’d be another bank. So, I guess this type of activity among banks isn’t unique.
That said, the majority of my money is with a local bank, with some CDs/MMAs at ING and DiscoverBank.
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Our main bank is Wamu. I’m going to take a wait and see attitude about the change. Our savings is still at 4% and I’ve not noticed any change in service yet. If they drop the interest rate (and I expect they probably will) or if service changes then we’ll likely look elsewhere. But theres no urgent need to change anything as far as I’m concerned.
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Look at the banks with the real history of community service. These are the banks that are not only deeply rooted in your community but they show good lending by having a history in the area you live. Obviously if they have survived 30+ years they are going to survive in the current environment. Look for banks that actually give back to where they are. Customer service generally is better in banks where the employees feel safe in the jobs they are at.
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*Edit* Alan beat me to it.
I work at a credit union and today we were told that all coverage on accounts was being bumped from 100k to 250k until December of 2009. After that, I do not know what will happen. I assume, but do not know for sure, that this is because of the “bailout” bill that was signed into law today. This will probably cover 99% of our members fully, so this is a big ‘relief’ to some. Just something to keep in mind.
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I spread my bank accounts over various banks, not just for FDIC regulations, but also just for peace of mind. I use some local banks and some national ones, including online ones like INGDirect and E*Trade Bank.
I had one CD account at IndyMac Bank. It was taken over by the Federal Government and became IndyMac Federal Bank. The only thing I had to do what submit a letter confirming that I was the owner of the account. My interest and internet banking access have continued uninterrupted and will continue for the life of the CD. Except for the first 2 days when the takeover occurred, the transition has been seamless, thanks to the FDIC.
DeeBee
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“Obviously if they have survived 30+ years they are going to survive in the current environment.”
@JChow What makes you say that? Washington Mutual was founded in 1889 and Wachovia was founded in 1908.
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@dan:
What makes me say that is the sentence before it, talking about community banks. There is a large difference. WaMu and Wachovia may have started out that way, but also became quite large. The community banks that have flourished and survived are the ones that will continue to. It is true that both large and small corporations and business can make bad decisions, but the banks that are ran by the same people year after year tend to have safer numbers simply because they know the communities that they are lending in. Do you see my trend of talking about community banks? So to answer your question, a True community bank that is deeply embedded in the community is one that will survive turbulent times.
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Re: Scott’s comment:
“I work at a credit union and today we were told that all coverage on accounts was being bumped from 100k to 250k until December of 2009″
Yup! That is true. It is part of the legislation. They did it to stop wealthier investors from reducing their deposits if they had exceeded the $100K limit, which was contributing to the ‘run on the banks’ and therefore the banks ability to cover their own funding.
One disquieting piece of news that I read today indicates that some CDs and Money Market Funds may not be insured at all. The reason given is that these instruments are considered as investments and not interest bearing whatevers. it was mentioned that possibly they would now be included as covered under the bailout. I’m not sure if they have been or not, but I may have a lot of cash in mutual funds right now with TDAmeritrade, rather than in stocks. I’ll have to check.
What bothers me about this possibility is that any institution I have used has happily stressed that they are **FULLY FDIC INSURED**. I’m guessing that in the small print, there is a disclaimer about CDs and Mutual Funds??? Hmmmm …
jegan
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JChow… I don’t claim to know much about banking, but it would seem to me that larger banks have more going for them than smaller banks:
- Just like an index fund spreads it’s risk over a broad category of stocks to lower risk, a larger bank will be able to spread its risk over a variety of communities.
- Just as a large business such as Wallmart or McDonalds can offer cheaper product through cost benefits of larger numbers, a larger bank should be able to borrow at a cheaper rate and get better deals on everything from leases to equipment, supplies and services costs.
Small banks are also under the gun, as they have to compete against larger banks in offering services, such as free ATM charges and the like. They also will be able to attract larger business customers, who presumably would keep a larger float.
However, I do agree that a manager who has been at that location for many years is presumably effective ..Or on the other hand not promotable
jegan …
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I’m sticking with my credit union…it seems like a safe place to be. Regardless, I’m way, way, way under the 100k limit of FDIC insurance! There are upsides to being quite un-rich.
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John B. Egan: Yes, I heard earlier this summer that mutual funds were not covered. This was on a NPR show right after it was announced that a specific amount of banks (can’t remember the exact amount) were in dire straights. They were of course unnamed at that point to prevent runs on them. Interesting that they are raising the coverage to 250K. I’d like to know where the money will come from if that kind of coverage is claimed in the future, especially by lots of customers…I truly do not understand economics. Sorry if this was covered. I haven’t read through the comments, yet.
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@Jegan
I fully agree with you on your points. Here is my question to you, what truly defines large and small? Is a large bank one with 2 branch locations? Or is a bank that employs 20 people a small bank? Or is it based on the holdings of the company? Is a publicly traded company more like to make bad or sub prime loans whereas a tightly held office may have not due to risk exposure? Or are these large and small companies all following the same standards, that if debt to income and loan to value rations aren’t matching up with things in the loan process, the loan is being denied? Obviously not otherwise we would not be in our current economic turmoil. Banks are highly regulated yes, but if as closely as we think then why would they be failing? If the banks loan portfolios are having steady growth as well as stead income earning streams, then all should seem fine, but is that always the case? And on your point that smaller banks have to compete with larger banks and offerings such as ATM fees and different other promotions, take a look at the fine print on all bank offers and I think you will see that the products aren’t really “consumer friendly”
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JChow… Not sure if it really is pertinent to whether or not a bank is secure or of quality, but:
I would qualify a small bank as one that has a few locations, such as my small S&L that was swallowed by Wells Fargo last year. They had 7 locations. And to me, this would fall under your appraisal of a local bank with a manager that knows his market and customers. A larger bank, I would categorize as a chain with many locations, such as BofA, Wells etc. Actually, I suspect the microcap, smallcap, midcap and largecap definitions as used in the stock market would probably be a better definition, I just don’t know if my little local S&L would even really qualify as a microcap.
I’m not sure if whether or not the company is publicly traded would be indicative of whether or not it is likely to produce more bad loans. I suspect it has more to do with the quality of the management as business decisions seem to do across the spectrum of industries. I think we’d agree that Toyota and Honda have made better business decisions than any of our Big Three for example and all are publicly traded. Compare that to Delorean, which I believe was privately funded, and where are they now?
Clearly there are differences in how the companies (big and small) handle loan applications. I wonder if a smaller bank if it was in a financial squeeze might have to lend outside its stated guidelines where a larger bank might not care if it didn’t make the sale. Lord knows, I’ve had guidelines thrown at me in the past and nobody seemed to care as I walked out the door.
I didn’t say that banks are highly regulated. My understanding is that a lack of regulation and an easing of restrictive guidelines coupled with the change in policy allowing lenders to sell the loan, bundle them and sell the packages was the origination of our present problems. The idea is that if you sell your problems and just become a loan generation mill, then you aren’t left holding the baby when problems occur.it’s interesting to note that Volker cautioned Congress about these issues as he was turning over the keys to Greenspan, who had no issue with the changes. I guess Volker was right and Greenspan was wrong.
And as to the last sentence. I think the old insurance quote “Give it in the big print and take it away in the small’.. suits banks as well.
jegan
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