Are Your Bank Deposits Now at Risk?

Are Your Bank Deposits Now at Risk?
By Dr. Steve Sjuggerud

Investment bank Bear Stearns vaporized yesterday... On Friday, it was worth $20 billion. As of yesterday, it's basically worthless.

Bear Stearns has 14,000 employees, and many loyal, long-time workers saw their kids' college funds vaporize in a day.

The question is, are you and I at risk here? If Bear Stearns can vaporize in a day, then can your bank too? Can Bank of America, for example, end up the same way Bear Stearns did? Are our bank deposits now at risk? And is there anything we should do to protect ourselves?

I posed these questions to two top executives from different banks yesterday.

These questions would have seemed crazy just a year ago. But financial institutions do fail, actually... The savings-and-loan crisis of the 1980s cost taxpayers $125 billion in government money. More than 1,000 institutions went under, and federal deposit guarantees kicked in to save investors' deposits.

Both bank executives I talked to yesterday were quick to emphasize that "regular banks" are quite different from "investment banks." In other words, Bank of America can't vaporize like Bear Stearns did.

Regular banks (like Bank of America) are heavily monitored by many levels of banking regulators. Investment banks (like Bear Stearns) are not regulated by bankers... They're not officially banks. Importantly, regular banks can easily tap additional resources by going directly to the Federal Reserve.

So Bank of America won't disappear overnight. But still, you can give yourself some extra protection...

You probably know that your bank deposits are protected up to $100,000 by the government. But what exactly does this mean? For example, if you have a $100,000 checking account and a $100,000 CD at the same bank, does that mean you're protected up to $200,000? The answer is no, actually – it's $100,000 for you, PER BANK.

That "per bank" part is the important part. Frank Trotter, founder of EverBank, said to me yesterday, "It's never a bad idea to spread your deposit assets around."

The Federal Deposit Insurance Corporation (FDIC) guarantees you $100,000 worth of deposits per bank. But what if you have more money... substantially more? To be as close to 100% protected as possible, you could put up to $100,000 in different banks.

Frank Trotter had one suggestion: "Put your first $100,000 in the bank you do business with. Then, if you're worried, and you don't want to open a bunch of different accounts, you could do something like our Insured Advantage CDs."

Now this is a nifty idea... You can put millions into an Insured Advantage CD and have it all FDIC insured. What EverBank does is spread your money around to several community banks... In essence, if you invested a million dollars in an Insured Advantage CD, you'd have an account at 10 different banks, with each $100,000 insured by the FDIC. You'd get one statement from EverBank.

Of course, this CD pays a bit less interest. But it does provide some peace of mind... It's an interesting idea, at the very least.

But please don't jump to any "Chicken Little" conclusions here... I'm not predicting a string of bank failures... or the potential loss of your deposits above $100,000. I just wanted to get to the bottom of what the logical extreme looked like, and what to do about it.

As the old saying goes, an ounce of prevention is worth a pound of cure. The ounce of prevention is simply spreading your banking deposits around a bit to have them 100% FDIC insured. While chances are good you'll never need the prevention, it's not hard to do.

Isn't it worth it, to have all your bank deposits government guaranteed?

Good investing,

Steve