The Dow Industrial average is getting killed on the fears of accelerating bank failures caused by the sub-prime mortgage crisis and the weakening economy.
Fannie Mae and Fredie Mac were taken over by the U.S. Government. Lehman Brothers filed for chapter 11 bankruptcy protection. Other large banks and companies have had billion dollar government bailouts earlier this year. And on it goes.
What does all this mean to small business owners?
The first consideration is whether you are a large depositor of funds or a borrower of funds.
Today I am going to discuss the effect of bank failures on depositors of funds.
There is no doubt that the high profile failures and take-overs will have a significant impact on the banking industry and small businesses, however, the Office of Comptroller of Currency (OCC) has been reported to only have 117 U.S. banks on its watch list of troubled banks as of June 2008. The OCC doesn’t regular state chartered banks so there could be a number of state chartered banks that are in trouble also.
In late August, FDIC chairwoman, Sheila Bair testified before congress that the pending bank failure rate could accelerate at such an alarming rate that the FDIC may have to borrow from the Federal Reserve to cover losses. The failure of the FDIC to adequately reserve for such anticipated losses is simply shameful since banks that are protected by the FDIC pay premiums to insure the safety of the entire system. This is a topic for another post.
You are most at risk if you have deposits in excess of $100,000 per account holder. By FDIC rules, if a bank is taken over by the appropriate regulators, any deposits in excess of the $100,000 are lost. However, if a bank merges before the regulators close it, your deposits in excess of $100,000 are not likely to be lost as has been the case in a few of the bank failures this year.
If you are in the position to keep balances in a bank in excess of $100,000 and you are concerned about your bank, ask them for their latest condition report. This condition report for all FDIC insured banks is also available online. Look at the section of the call report called schedule RC-R, Regulatory Capital. Look at line 33 titled “Total Risk Based Capital Ratio.” The higher the ratio, the stronger the bank is and the less likely the bank will have difficulties meeting its obligations. If the ratio is less than .10, the bank is minimally capitalized and unless it is a brand new bank, one should consider moving deposits in excess of $100,000 per depositor to another unaffiliated institution.
On my next post, I am going to discuss how bank failures affect you when you are a loan customer.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
You may contact Sam directly at: firstname.lastname@example.org
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EXTRA: If you have questions for Sam regarding business financing, the credit market, and similar issues, please send an e-mail. Your questions will be recorded and Sam will answer the best ones in his Ask the Expert podcast show.