Bank Run

Remember that scene in Frank Capra’s “It’s a Wonderful Life” when George Bailey (played by the earnest James Stewart) is trying to save his father’s “cheap, penny-ante Building and Loan”? As rumors swirl around the bank’s potential demise, the depositors line up and demand their money---a classic bank run. Given the stories of the past week, some are wondering if we are experiencing a little truth that is stranger than fiction.

Last week, Pasadena, CA-based IndyMac Bancorp was seized by federal regulators, in the third largest banking failure in US history. During the height of the housing boom, IndyMac was a prolific mortgage specialist and became one of the largest savings and loans in the country. The FDIC took over and reopened the doors for business on Monday, sparking concerns among depositors of similar savings and loans throughout the country. As experts attempted to identify “the next IndyMac,” investors and depositors became nervous about the viability of various regional banks.

National City Corp, based in Cleveland, OH, was forced to issue a statement it was “experiencing no unusual depositor or creditor activity.” That may be so, but investors didn’t buy it and the stock plummeted by 15%. Similarly, Washington Mutual said that it “significantly exceeds all regulatory ‘well-capitalized’ minimums for depository institutions.” Shares fell by over a third and closed at $3.23 on Monday. One astute friend noted that you could now purchase a share of WaMu for less than a gallon of gas.

The failure of IndyMac and rumors of other problems lead us to review the rules of the Federal Deposit Insurance Commission (FDIC). If one of the nation’s banks fails, the FDIC protects individual accounts up to $100,000 per deposit per bank or $250,000 for most retirement accounts. Some have wondered why the amounts remain at these levels despite inflation, but the reality is that by law, the FDIC can’t increase the coverage until 2011. However, even if you have more than $100,000 in the account, you may be partially reimbursed. In the case of IndyMac, regulators believe that depositors will eventually get 50% of the uninsured amounts.

[There is an important note for those who use a bank for saving and investing: the FDIC does not insure money invested in stocks, bonds, mutual funds, life-insurance policies, annuities or municipal securities, even if these investments were bought from an insured bank. Those assets are usually covered by Securities Investor Protection Corporation (SIPC), which covers up to a ceiling of $500,000 per customer, including a maximum of $100,000 for cash claims, held by a customer at a financially troubled brokerage firm.]

If you have more than the $100,000 in an account, one way to protect yourself is to spread out your money at a variety of institutions. If you think that’s too much of a pain in the neck, then open different accounts—an individual account for you, one for your spouse and then perhaps a joint account for the two of you. That way, you can maintain $100,000 per account. Make these changes before bad news emerges, because the FDIC does not create a warning for banks that are in trouble.