Bank Size and Stability: A MoneyRates.com Analysis
April 22, 2010
In mid-March, the political blog site Huffington Post carried a MoneyRates.com analysis on the security record for large banks vs. small banks in 2009. The Huffington Post has been running a campaign encouraging readers to withdraw their deposits from large banks to protest government bailouts and the banking practices of some large institutions.
Possibly the politics of the bailout and financial regulation aren't factors that would sway your choice of depository institution--but the results of the analysis should be of interest to anyone looking for optimal places to bank.
Although MoneyRates.com's mission is to help you find competitive bank rates on savings accounts, money market accounts, and CDs, the stability of the bank offering those rates is at least as important.
The Safety Track Record: Large and Smaller Banks in 2009
The financial crisis profoundly shook the way Americans look at the banking system. Large institutions that for decades had been paragons of stability and success were suddenly failing, or else were rescued from the brink of disaster by a hastily arranged merger and/or government intervention.
In light of all the high-profile problems of large banks in the financial crisis, MoneyRates.com wondered: Are large banks more likely to fail than smaller banks?
MoneyRates.com looked at FDIC data on bank failures in 2009. A bank among one of the largest 100 in the US based on asset size was defined as a "large" bank. To give a sense of scale, the cutoff point was at roughly $11 billion in assets.
Based on this categorization, there were five failures of large banks in 2009, and 130 failures of smaller banks in the same year. Of course, this does not suggest that large banks were necessarily more stable, because there are a great many more small banks than large banks.
Five failures in the top 100 banks would translate to a failure rate of 5%. In contrast, there are some 7,896 banks with less than $11 billion in assets. Having 130 fail out of this population yields a failure rate of only 1.6%.
It should be noted that the analysis looked at actual bank failures during 2009, and this history is not necessarily predictive of future performance. However, it is useful background to anyone considering the relative merits of large and smaller banks. In 2009, at least, big banks were more likely to fail than smaller banks.
There's no way of telling whether this performance will be repeated going forward, but it does suggest that depositors shouldn't necessarily gravitate toward larger banks because they seem more secure.
Weighing Bank Rates and Security
The bottom line is that bank depositors need to weigh both the security of a bank and the rates it offers. Bank failures can come quickly and unpredictably, so always make sure you deposit with banks that are covered by FDIC insurance, and attempt to keep your deposits within FDIC coverage limits, which apply per depositor, per banking institution.
As for bank rates, they are more of a known quantity than the potential landmines lurking in bank accounting, so in addition to checking on FDIC insurance coverage, you should compare rates on MoneyRates.com as part of your process for choosing a bank.
