How Safe Are My Banks?

With all the turmoil in the financial market and the increasing number of failed banks, big and small, one of the questions people ask a lot these days is “Is my money safe?” Since we put our hard-earned money in banks as opposed to under the mattress, the question can be partly translated to “Is my bank safe?”

In most cases, money in the banks is safe as long as the banks are members of the Federal Deposit Insurance Corporation (FDIC) and the total amount of money with a specific bank is under the FDIC insurance limit. Despite the guarantee from the government that our money in the bank is safe, it won’t be a pleasant experience to go through the process of claiming our money after the bank we use fails (the failure of IndyMac created quite some chaos). Because there’s no authoritative information available (the FDIC only says there are a number of problem banks, but doesn’t let us know who they are), it’s difficult for us to know the soundness of a bank, though we can get some ideas from the media. For example, before WaMu went under, it has been the subject of rumors for months that the bank was in deep trouble. Though I am not worried about my banks, it would be helpful if there’s a system that can give us some advanced information on the health of our banks.

Bankrate.com has developed such a system, Safe & Sound CAEL rating system, that rates banks based on their fundamentals. According to Bankrate.com’s description, the Safe & Sound rating is

designed to provide information on the relative financial strength and stability of U.S. commercial banks, savings institutions and credit unions. The system employs a series of twenty-two tests to measure the capital adequacy, asset quality, profitability, and liquidity (CAEL) of each rated financial institution.

I have no idea how accurate the rating is, or whether the system can discover any potential risk of a bank and reflect such risk in the rate, but think it’s an easy tool for us to have an idea of the well-being of a bank. The Safe & Sound rating system has two part: The CAEL rating and Star rating and it rates banks at five levels: with CAEL rating of 1 (5 stars) being the best and 5 (1 star) the worst. To see how it works, I used this tool to check the ratings of our banks.

We are currently using five banks for my banking needs. Among them, Bank of America is our primary bank which receives all our deposits, by checks and by direct deposit. We have our only checking account with BoA. From there, money is then transferred to four online banks to earn interests and we use BoA checking account to pay all our bills. Comparing to other banks, BoA seems to be in a better shape. Otherwise, it won’t be able to buy Countrywide and Merrill Lynch when many other banks are seeking capital infusion. The ratings of BoA are:

• Bank of America, N.A.: Bankrate.com Star Rating: 3 stars, Safe & Sound Rating: 3

The other four banks are online banks offering better interest rates so that we can use these banks to grow our money. The Bankrate ratings of these banks are:

• Capital One (a division of Capital One Bank N.A.): Bankrate.com Star Rating: 5 stars, Safe & Sound Rating: 1
• FNBO Direct (a division of First National Bank of Omaha): Bankrate.com Star Rating: 4 stars, Safe & Sound Rating: 2
• IGoBanking, (a division of Flushing Savings Bank): Bankrate.com Star Rating: 4 stars, Safe & Sound Rating: 2
• HSBC Direct (a division of HSBC Bank USA, N.A.): Bankrate.com Star Rating: 2 stars, Safe & Sound Rating: 4

Does knowing the ratings of my banks make me feel a little easy? Well, it’s hard to tell because, as I said before, I am not sure if this is the system we can trust. Just like what Bankrate said, the rating “should not exclusively be relied upon in making banking decisions.” There are other factors to consider when choosing which bank to use. That being said, I am glad none of my banks scores poorly.

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