These are good questions, and there are answers to both. Luckily “How safe is a bank?” is not the most important question. The most important question is, “How safe are your deposits?”
The safety of your deposits has an easy answer. The safest place to keep funds is in an FDIC insured institution – a bank. In 1934 Congress created the FDIC specifically to provide stability in times like these – and the FDIC has always succeeded. In its 76 year history, not one penny of insured deposits has ever been lost, and the banking industry pays the full tab to keep FDIC strong to protect depositors” funds.
So how safe is a bank? Colorado’s banking industry is stable and has ample resources to handle any problems from our recovering economy. As an industry, Colorado’s 165 banks hold 150 percent of the capital traditionally required by regulators, and reserves to protect against loan losses are at record levels. Banks in Colorado hold $100 Billion in assets, have a stunning $14 Billion in risk based capital – a very impressive amount – and retain loan loss reserves of $1.5 Billion.
That doesn’t mean Colorado should never experience a bank closure. The isolated closure will inevitably occur from time to time – in good economic conditions and bad. While news of a bank failure can cause some concern, the event usually has very little impact on the public.
Because of the time-tested FDIC resolution process that monitors, takes over, and winds down a bank, communities and customers are as insulated as possible from adverse conditions. The FDIC’s process for a bank closure has been tweaked and perfected over the past 76 years to ensure that customers are protected and the least amount of disruption occurs to the community when a bank encounters tough times.
For those customers left to find a new bank, today’s highly competitive banking industry provides Coloradans with convenient access to banking services and numerous choices. One closure generally doesn’t change that.
Attempting to judge the health of a bank is a very complicated process. Bank regulators are able to see the entire picture only after sending numerous skilled personnel physically into the bank for weeks at a time, to review all areas of the bank and discuss issues with management.
Don’t be alarmed by dire reports from private for-profit rating companies or simplified rating scales like the Texas ratio. They see only limited raw data which tells only a mere fraction of the story. This lack of information makes it hard for these firms to ensure they have an accurate assessment of an institution (either good or bad).
Judging a bank on this limited data is like trying to judge someone’s health by only knowing their height and blood pressure – it’s not enough info to be precise.
Furthermore, some folks mistakenly think bank closures cost U.S. taxpayers. No tax dollars go to FDIC; it is fully funded by banks. Simply put, the FDIC expenses incurred while closing a bank are paid for by existing banks, and your deposits are fully insured up to at least $250,000 by the FDIC at all times and under all circumstances.
Don Childears is president and CEO of the Colorado Bankers Association. EDITOR’S NOTE: This is an online-only column and has not been edited.
