Along with Money Market Rates, Should the Safety of New Banks Be a Factor in Your Search?

Finding a Safe Home for Your Money Market Account

When you compare money market rates, you'll find that the list of banks offering competitive rates includes some household names and some institutions that are unknown to you. In years past, as long as the money market rates were fairly similar, you might have felt more comfortable choosing a more familiar name for your money market account. But now that the banking crisis has soured consumers on some of the biggest names in the business, those less familiar banks may look more attractive. But are relative newcomers to the market any safer?

Some new FDIC regulations may change the way you look at newer banks--and possibly for the better.

New Bank Regulations

The FDIC recently tightened regulations regarding new banks. For one thing, it broadened the definition of what a "new" bank is. New banks are put on a form of probation, during which they are subject to tighter rules and increased regulatory oversight. Previously, this probationary period lasted for a bank's first three years. Now this period has been extended to seven years.

As a result, all banks less than seven years old will be examined at 12-month intervals, versus 18-month intervals for older institutions. Newer banks must also meet stricter capital requirements. In addition, banks during their first three years must receive express permission from the FDIC if they want to alter their original business plan. Previously, they had to notify the FDIC but did not need approval. Banks reaching the three-year mark are required to submit an updated business plan covering the subsequent four years, then get the FDIC to sign off on the new plan.

Finding a Home for Your Money Market Account--the Pros and Cons of Newer Banks

Does this increased scrutiny suggest that newer banks are a safer place for your money market account? The bad news is that the intensified probationary period was triggered by the FDIC's finding that newer banks were overrepresented among bank failures of 2008 and 2009. In particular, many failed banks ran into trouble during their fourth through seventh years of operation, which explains the lengthened probationary period. However, the good news is that the tighter rules in place now should make newer banks a safer proposition going forward.

Newer banks have some other advantages with regard to deposit vehicles such as money market accounts. They may be more aggressive about attracting assets, which could translate into higher money market account rates. Also, newer banks may not have the problems with troubled loan portfolios that some older banks have. Higher profitability in the absence of bad loan portfolios may also allow newer banks to offer higher money market rates.

Of course, more established banks have certain advantages as well. The lesson here is that you should find the best money market rates by searching a wide a range of banks, including some that may be newer and less familiar to you. You can draw some comfort from the fact that even though you may not have heard of a given bank, the FDIC has.

 

Source:

Enhanced Supervisory Procedures for Newly Insured FDIC-Supervised Depository Institutions • Aug 28, 2009 • FDIC: http://www.fdic.gov/news/news/financial/2009/fil09050.html

Joe Adler • New-Bank Probation Extended, Intensified • Aug 31, 2009 • American Banker: http://www.americanbanker.com/issues/174_167/new_bank_probation_extended_intensified-1001531-1.html?ET=americanbanker:e435:2242572a:&st=email

 

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