Should You Be Worried About Bank Failures?

Customers of one California bank learned last weekend that home equity isn't the only thing that can disappear during a national housing crisis. Federal regulators on July 11 seized IndyMac Bank, with $32 billion in assets, which had been impaled by a run on deposits and rising defaults. The once booming Pasadena mortgage lender became the third-largest bank to fail in American history and the fifth bank failure so far this year.

The Federal Deposit Insurance Corp., which guarantees accounts at more than 8,500 banks and savings associations, is now running IndyMac. The agency typically insures deposits up to at least $100,000.

As the banking industry buckles in the face of a slew of troubling developments—from falling home prices to higher loan delinquencies—federal agencies have been preparing for an increase in bank failures. Federal officials have warned that banks might go under, and the FDIC has even taken steps to bring a number of officials—veterans of the wave of bank failures in the 1980s' savings-and-loan crisis—out of retirement.

Here's what you need to know about bank failures.

Should I be worried about my bank failing?
For the most part, the answer is no, partly because it is nearly impossible to spot a failing bank, says banking consultant Bert Ely. "Almost no one should try to figure out whether or not their bank is going to fail. What they should do instead is to make sure their deposits are insured," he says.

How do I know if my deposits are insured?
The Federal Deposit Insurance Corp. insures up to $100,000 per depositor at banks and savings associations. (In some cases, such as with certain kinds of deposits in retirement savings accounts, it insures more.) That means that if a bank goes under, Uncle Sam will give you your money back.

Of course, the money is protected only if it is in an actual bank or savings association that is registered and insured with the FDIC. Some institutions, including fraudulent ones, call themselves banks but are not actually registered as such. To make sure your bank is FDIC insured, look it up on the FDIC's institution directory, or call the FDIC's consumer hotline (877-275-3342). David Barr, FDIC spokesman, says that consumers who use the Internet to search for competitive interest rates on savings accounts and come across an unfamiliar bank should first check to make sure it is FDIC insured. "These days, it's easy for criminals to set up a website to try and trick consumers into turning over money to them," he says.

But I have more than $100,000 in my bank account. Will it be protected?
Consumers with more than the insured amount in their savings accounts should spread it around among different banks, advises Ely, since only $100,000 will be insured at each institution. (To be safe, put no more than $95,000 in each account, to protect any interest that accrues.) But don't make the mistake of putting money in different branches of the same bank; to be protected, it has to be deposited at different banks.

The FDIC offers a calculator that lets users figure out their insurance coverage by entering their account information.

Are my investments insured?
No. The FDIC does not insure investments, even those in retirement accounts and even if they were bought through an insured bank.

If my bank fails, how long will it take for me to get my check from the FDIC?
According to the FDIC, it usually makes insurance payments within a few days of a bank's closure, either by check or by deposit at another bank.

How often do banks fail?
IndyMac was the fifth bank failure this year. There were three failures in 2007 and none in 2006 or 2005.

How many banks are expected to fail this time?
"It's our view that regulators are expecting 100 to 200 banks to fail"—or be forced by regulators to sell themselves—over the next 12 to 24 months, says Jaret Seiberg, a research analyst for the Stanford Group. Seiberg expects those failures to occur predominantly in states like Ohio, Michigan, California, and Georgia—where the construction lending market, which includes residential real estate, is expected to weaken dramatically.

What size banks are regulators most concerned about?
In congressional testimony earlier this year, Federal Reserve Chairman Ben Bernanke noted that while certain smaller banks—especially those concentrated in real estate lending—could go under, the nation's banking giants face less danger.

Updated on 7/15/2008.