Will Bank Failures Skyrocket?

The number of bank failures in 2009 has been a hot topic of discussion in Washington DC. The 21 bank failures in the first quarter of 2009 marked more bank failures than the United States saw from the years 2000 to 2007 combined.  Yet this is just a very small percentage of failures considering there are more than 8,000 banks in the country. Lawmakers have shored up the FDIC's insurance fund in anticipation of more bank failures, but just how many more should we expect?

The FDIC was created after the great banking panic during the Great Depression of the 1930s when over 9,000 banks failed wiping out fortunes big and small. Today Americans have the guarantee of FDIC insurance, but we still have no idea how many banks will end up failing or how the failures will affect us. Predictions by banking experts for the number of bank failures in 2009 range as low as 30 and as high as 1,000. A dichotomy this great is surprising.

Renegade Banker Warns of More Failures
Texas banker Andrew Beal is not your everyday banker. He is an outsider who through his bank, Beal Bank in Dallas, buys when other bankers sell and sells when they are buying. He is also not shy about taking on state banking regulators and the FDIC who can't quite figure out Beal and his banking moves.  The Texas banker has also become widely known for challenging some of the world's most famous poker players in million-dollar stake card games. The point isn't that Beal is smarter than other bankers. But it might be true that Beal is more likely to say what other bankers won't say publicly.

The most interesting thing that Beal has said recently was the   proclamation in a Forbes interview that nearly half of the nation's banks would be closed if their true numbers were reported. Is this Beal being a renegade again or an insider telling us that bank failures in the hundreds or even thousands are possible? It might sound preposterous, but so did saying a year ago that the stock market would fall 50%. Or that Merrill Lynch, Lehman Brothers, and Washington Mutual Bank would all be financial casualties. Time will tell if Beal is right or giving good quotes.

Protecting Your Funds
The most obvious point about the bank deposit insurance offered by the FDIC is that you need to stay below the maximum insurance amount allowed by law. For an individual this means $250,000 per aggregate deposits for each FDIC-insured bank. The insurance limit of $250,000 expires December 31, 2009, unless Congress passes a pending bill to make the insurance increase to $250,000 a permanent law.

Even with the generous $250,000 insurance limit, depositors need to remember that special rules apply to joint accounts, trust accounts, IRA accounts, and corporate accounts. Check the FDIC's Electronic Deposit Insurance Estimator (EDIE) to check and print your insurance coverage.    Paying attention to the deposit insurance rules is much more important than trying to predict which banks will fail. Even if Beal's warning was right and half the banks in the United State fail, we have to plan that the FDIC will be solvent and keep under the insurance amount. Bank rating services can provide some warnings on undercapitalized banks (higher risk banks), but these ratings are not foolproof. Your best protection is in the adherence to the insurance laws and not trying to be one step ahead of the FDIC's bank failure team.