Why You Should Limit How Much You Keep in a Single Bank
Worries over the banking crisis are panicking many Americans. Is your money safe? Two of the countries largest banks, Washington Mutual (WaMu) and Wachovia have failed in recent weeks and other banks are struggling. WaMu was purchased by JPMorgan Chase, and as of this writing, Wachovia is still in negotiations with potential buyers. How can you be sure that your money is safe, regardless of what happens to your bank?
The most important factor in determining the safety of your money is simple—insurance. Banks are insured by the Federal Deposit Insurance Corporation or FDIC. While this is changing due to recent legislation, traditional FDIC insurance limits were $100,000 for funds deposited at a single bank per individual. This coverage includes all accounts at a given bank. The financial bailout package passed by the Senate and House and signed into law on October 3, 2008 increased the FDIC insurance limit to $250,000 which was extended until December 31st, 2013.
You should also take a look at reliability and rankings for your bank. While the FDIC does rank banks, this information is not publicly available. You can look at sites such as Bankrate to assess your bank's overall solvency and have a better idea and understanding of the financial status of your financial institution. Similar rankings are available from Highline Financial. It should be noted that both Highline Financial and Bankrate rated recently failed WaMu quite low. While a low score may not necessarily mean that your bank is at risk of failure, it is a factor to consider. Both major national banks and smaller local banks and credit unions are ranked.
You may feel more comfortable if you make a trip to your local bank and talk with the management. They can likely offer reassurance and confirm that your money is FDIC insured when you bank with them. Smaller local banks remain a safe and reliable place to keep your money.
While higher FDIC insurance limits may provide some level of reassurance, you should be aware that some of the measures in the current bailout plan are intended as short term solutions to a crisis and may not be in place long term. This includes FDIC protections for money market mutual funds. Keeping your money spread between banks remains a good strategy; however, some Americans, including small business owners are likely relieved by this decision as it makes their daily banking a simpler and less tedious process while still maintaining financial security. A premium increase for banks will likely go along with this increase in FDIC limits, so customers should expect the potential for these costs to hit their pocketbooks.
It is important to note that much of the time when banks fail, they are bought out by another more solvent bank, providing the customers with a near seamless transition. These changes happen frequently, not only in times of financial crisis. Customers of banks like WaMu and Wachovia should not panic over the safety of their money, but should educate themselves on their banking options.