Bank failures have recently made headlines across the nation, but Delawareans have little to fear from busted banks, experts say.
In a highly publicized takeover, the Federal Deposit Insurance Corporation (FDIC) closed Pasadena, Calif.-based IndyMac Bank last month, marking the fifth bank failure of the year, and the third largest failure in U.S. history.
While it garnered widespread attention and damaged consumer confidence, Delaware’s banking industry is safe because most of the First State’s banks avoided the risky, sub prime mortgage loans that helped bring IndyMac down, according to David Bakerian, president of the Delaware Banker’s Association.
Delaware consumers should not be concerned about the banking industry, Bakerian said, because IndyMac’s failure was more a result of negative attention than financial woes or sour economic conditions.
IndyMac had been put on the FDIC’s ‘watch list’ because the bank was starting to feel the effects of bad loans, so the FDIC started a program to get IndyMac back on its feet, Bakerian explained. But before the bank could recover, the media got wind of its troubles and published numerous stories that eroded confidence in IndyMac, he said.
The news stories caused a run on the bank: investors withdrew $1 billion from IndyMac in one week, Bakerian said, causing the FDIC to step in and take control.
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But despite continuing pessimistic headlines, IndyMac and the other seven bank failures this year have not had a harmful effect on the industry or consumers because of the FDIC, said Bakerian. The FDIC insures all single bank accounts up to $100,000 and all retirement accounts up to $250,000, so even when a bank fails, people’s accounts do not disappear, he said.
“No customer has ever lost a penny in insured deposits when there has been a bank failure,” said Bakerian.
While bank failures are never good news, they are not uncommon and the industry is not facing a failure crisis, he said. Its true that some banks have been hurt by the economy’s downturn, coupled with increasing gas prices and defaulting borrowers, but the problem is far from Great-Depression levels, Bakerian said.
Only 90 banks are on the FDIC’s current “watch list,” as opposed to 1,500 in 1990, a year when 380 banks failed.
No Delaware banks are on the list.
Banking regulations have strengthened since 1990 and more banks are focusing on quality loans, Bakerian said, which has led to fewer failures.
But even when banks fail, as long as customers have followed FDIC guidelines for insured deposits, they have little to worry about, said Chris Walton, a certified financial planner at Independence Wealth Services in Hockessin.
Two of his clients had deposits in banks that failed and the FDIC sent their full deposits, plus interest, less than 30 days after the failures, he said.
Backed by the federal government, the FDIC has $53 billion it can use during a bank failure – more than enough to cover IndyMac’s $4 billion and $8 billion failure cost, Walton said.
Still, bank failures do affect consumers because people associate failed banks with the Great Depression, said Walton, who has advised six people who recently called with concerns about their banks.
“The media reports these things and people lose confidence,” he said. “All those headlines add up and clients think, ‘Maybe I’m next. Maybe I’m on the chopping block.’”
