The ‘Problem List’ of the Federal Deposit Insurance Corporation comprises of all banks that are facing serious financial troubles. Factors that are considered in determining if a bank is vulnerable include assets, income, liquidity, sensitivity to market conditions, and the management of the bank. The number of banks in the list stood at 702 at the end of 2009 and it has been predicted that this year will be even worse.
This may come as a surprise to some people as the financial sector has managed to post impressive growth and profitability in the last 2-3 quarters. In spite of the good performance of the banking sector, the problem list grew because it is only the large banks that have witnessed an improvement in profitability. The smaller banks are still struggling for survival.
FDIC has been reassuring people that more than 95% of secured financial domestic institutions meet the regulatory standards. The total number of institutions in the list pales in comparison to the highest number that has ever been on the list, which was above 2000. So things are not all that bad.
In fact, only a few of the banks on the problem list actually fail, with the average failure rate around 15%. Most of the failed banks are acquired by healthy financial institutions or are helped to recover, for which the FDIC has enough funds. So according to the FDIC, there is no reason to worry. The agency does expect more banks to fail in 2010, but the number is expected to fall after that.
Despite all these assurances, you should not forget that the recovery of the overall banking sector is expected to be slow. A potential problem lies in the commercial real estate business. Small banks that have huge commercial real estate loans on their books could be in for a tough time.
It’s better to be cautious when it comes to protecting your hard earned money. You can avoid trouble by keeping less than $250,000 in your bank as the FDIC provides insurance only up to that amount. Usually, the agency manages to protect almost all deposits through this insurance in case of a bank failure.
Further, you should divide your savings among different banks. But avoid banks that have huge investments in commercial real estate and development loans as these sectors could see big declines soon.