Not all banks are teetering on the edge of financial collapse. In fact, many are humming right along with a business-as-usual mentality.

The old phrase, "stuck between a rock and a hard place," aptly describes how you might feel about your money right now. As banks fall like dominoes, and the stock market continues its historic descent, you could be wondering if hiding your money under the mattress might be the best alternative.

Failures overshadow stable players

According to the FDIC, 15 commercial banks collapsed between January 1 and October 10 of 2008. Two of them, IndyMac and Washington Mutual, ranked among the four largest banking failures in U.S. history.

While the media has exhaustively reported the troubles within the banking industry, the coverage hasn't exactly been complete. Yes, the Washington Mutual failure was particularly dramatic because of the sheer size of the institution; with $307 billion in assets, Wamu became our country's largest bank failure by a huge margin. But the press hasn't stressed two points that are very relevant to depositors:

  • Only about 2 percent of the country's 8,500 commercial banks are considered at-risk.
  • The FDIC insurance program has successfully protected insured deposits for 75 years.

Going local

The pool of safe U.S. banks includes many smaller, community institutions that have largely sidestepped the mortgage crisis. It's common for these local or regional banks to adhere to more conservative operating guidelines. In practice, that translates to underwriting loans that are affordable and realistic for borrower and lender alike. This focus has spared many community banks from the losses that are now ravaging their larger, national counterparts. The community banks that are unencumbered by subprime-related losses are still stable, safe choices for depositors.

If you're considering switching your savings to a community bank, ask to see the bank's financial statements. Pay particular attention to the accounting detail regarding the bank's allowance for loan and lease losses. The allowance is an estimate that's updated periodically; actual losses decrease the allowance and higher loss expectations increase the allowance. It's not a good sign if actual losses and the allowance are both increasing.

Remember the FDIC

Technically, bank safety isn't even an issue if your deposits are covered by the FDIC. Those who banked at Wamu and IndyMac can tell you-they didn't lose a dime of their insured deposits.

Even better, the feds recently increased FDIC coverage, raising the individual deposit limit from $100,000 to $250,000. Plus, you'll have additional coverage if you have joint accounts, retirement accounts, and irrevocable trust accounts. Make sure that your bank is an FDIC member, and review the insurance limitations at FDIC.gov. Then, if necessary, consult with your banker about restructuring your deposits to obtain full coverage.

Having money lying around really doesn't put you between a rock and a hard place. Actually, it's quite the opposite. Just make sure that you take full advantage of the FDIC's deposit insurance, and you can rest easy at night.

Published on October 31, 2008