Is Your Bank Safe?

My friend Karen called with a worry on her mind.  With all of the news about country downgrades, insolvent banks, and possible debt defaults, how could she be confident that her bank is really safe.  I think this is a very reasonable question, and there are some ways to mitigate bank risk.

–Know what is insured — a couple of years ago, I had an account with Washington Mutual as news about the real estate market was deteriorating.  Although they eventually were taken over, I became very familiar with the FDIC guarantee limits at that time.  Check and make sure that any money that you think is insured has the FDIC seal, money market funds and other funds that may have check writing privileges are typically not insured.  In addition, keep in mind that joint and individual accounts can be separately insured allowing for up to double the maximum.

–Be cautious of high teaser rates — to get you to switch to a new bank or a new instrument.  My experience is that these rates will step down and unless you are vigilant about them, can end up being far less attractive than initially thought.

--Explore credit unions — most of the bank problems have come from exposures of banks to derivatives, proprietary investment accounts, and trading accounts.  If you want to avoid exposure to all of these, a credit union may make sense.

–Split exposure to another bank — this probably only makes sense if you keep large bank balances, but for some people having two accounts will spread out the risk should one become problematic.

shared at Frugal Friday