February 28th, 2008
This could go alot of directions, but I’ll focus on some news posted on CNN and comments by our “good friend” Ben.
First from CNN is an article about potential bank closures on the horizon.
“Regulators are bracing for 100-200 bank failures over the next 12-24 months,” says Jaret Seiberg, an analyst with the financial services firm, the Stanford Group.
Expected loan losses, the deteriorating housing market and the credit squeeze are blamed for the drop in bank profits.
The problem areas will be concentrated in the Rust Belt, in places like Ohio and Michigan and other states like California, Florida and Georgia.
That is a lot of potential failures. What can you do to protect yourself?? First, as long as your deposits aren’t greater than $100,000 (some accounts such as IRAs, Joint Accounts, and some others?are insured separately), if a bank closes you will get your funds back. Generally, deposits are returned within 7 to 10 days. But, if you have longer-term CDs paying good rates, there is interest rate risk. Your 5-year at 5.50% could be closed and your available rates to re-invest at this time are much lower. And likely to become lower still.
Couple of things you can do. For new CD placements, check on the institution’s financials. Look for Established banks to be profitable (brand new banks usually carry a loss for up to 3-years). Also look for an Equity-to-Asset ratio of 7% or greater and/or a Total Risked Base Capital of 10% or greater. Finally consider reviewing their loan losses and delinquent loans.
For existing CDs, monitor the banks performance. Unfortunately the data that is available is usually about three-months behind. Data for 12/31/07 was just posted. If your institution’s performance continues to degrade and the penalty isn’t too large, you may want to close out your CD. Of course, you would want to compare that loss to what would happen if you let it stay and it is closed later on. I should write an Early Withdrawal Penalty calculator and post it. Send me some energy drinks and I can get that done. Or if you know of one, leave a link in the comments and I’ll link to it.
This post has become longer than expected. I will have some thoughts on Ben tomorrow.
You can view the article here.
-- By +Chris Duncan