A Hitchhiker’s Guide To Bank Failures

42.

Is that the number of banking relationships you need to maintain to weather this financial turmoil?

Not exactly.

Recent bank failures can be anxiety-inducing as people try to understand how to insulate themselves against the devastating consequences of bank failures.

The numbers paint a sobering picture: since 2000, there have been a staggering 546 bank failures in the United States alone. While we’ve seen a steady decrease in bank failures over the past decade, the 140 failures in 2009 – in the wake of the financial crisis – are a stark reminder of the risks involved in banking. But don’t despair – it’s not all doom and gloom. By staying informed and taking proactive measures, you can minimize the risks and be better prepared to navigate this financial turmoil. Not financial crisis. Financial turmoil.

I’ve outlined three strategies that can help safeguard your finances in the event of a bank failure.

Protect Your Savings with FDIC Insurance

The first step in protecting your savings is to make sure that your bank account is FDIC-insured. FDIC insurance provides coverage to depositors in the event that a bank fails, meaning that even if the bank goes bankrupt, your deposits are safe up to $250,000 per depositor per account. Most banks in the United States are FDIC-insured, but it’s always a good idea to double-check. By ensuring that your bank account is FDIC-insured, you can have peace of mind knowing that your savings are protected.

Diversify Your Bank Accounts to Mitigate Risk and Maximize Returns

Diversification is a fundamental principle of investing, and it’s just as important when it comes to banking. By spreading your deposits across multiple accounts and institutions, you can reduce your exposure to any one bank and mitigate your risk in the event of a bank failure.

One way to diversify your banking is to spread your deposits across different types of accounts. For example, you could have a checking account, a savings account, and a money market account, each with a different institution. Another way to diversify is to consider online banks or credit unions, which often offer higher interest rates and may be less vulnerable to bank failures. By diversifying your bank accounts, you can protect your assets and potentially increase your returns.

Monitor Your Bank’s Financial Health to Safeguard Your Assets

It’s important to keep an eye on your bank’s financial health to ensure that your deposits are safe. While most banks are financially sound, there are always outliers that may be at risk of failure. Monitoring your bank’s financial statements and credit ratings can give you a better sense of their stability and help you make informed decisions about where to place your deposits.

Many rating agencies (Moody’s S&P, Fitch, DBRS, Kroll, etc.) use proprietary rating methodologies. Banking regulators in the United States assess the overall health and safety of banks using a rating system known as CAMELS. It’s an acronym that stands for Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk. In simpler terms, it evaluates how much money a bank has on hand, the quality of its assets, the effectiveness of its management, how profitable it is, its ability to meet its financial obligations, and how vulnerable it is to changes in the market. The CAMELS rating system is an important tool used by banking regulators to identify potential risks to the overall stability of the financial system.

Stay calm. Get informed. Take action.

Protecting yourself in the event of a bank failure is a critical part of financial planning and preparedness. By making sure your bank account is FDIC-insured, diversifying your accounts, and monitoring your bank’s financial health, you can safeguard your hard-earned assets and reduce the risk of losing your savings. With a little foresight and proactive planning, you can be better prepared to weather this financial crisis, erm, sorry, financial turmoil.