Okay, so you are worried that your
bank may be in a spot of trouble, or maybe you just want your money in
the safest bank in town. How do you pick one?
One thing you should absolutely do is obtain a $35 report from Veribanc.com
called the Blue Ribbon report. You select the report that covers the
region in which you live, and then you only consider banks on that
list.
You then cross-check the Blue Ribbon list with the Weiss Ratings (now owned by TheStreet.com), found here. I only consider banks with a B+ or higher rating to be sound in this environment.
There's a pretty good chance you won't find your bank on both lists, because their coverage is not universal. I feel better if the bank in question is highly rated on both systems, okay if it is highly rated in one but missing from the other, not so good if it is ranked on the Blue Ribbon report but below B+ on the other, and terrible if it is missing from the blue ribbon report and ranked below B+.
Now that you have assembled a list of candidates, it is time to go and check their stock prices. Why? Because the bank ratings are not infallible; they tend to rate based on how certain bank characteristics have fared historically (and these are unprecedented times), and the ratings are assembled relatively infrequently, meaning that if something changes for the worse, the stock price is going to be your best early indicator of health.
Here are a few banks I would most assuredly exclude, based on their stock charts. Note that I could put many, many more here...
If most deposits, if not all, are “Federally Insured” then why would we have to pick a “safe” bank? And what, exactly, does “safe” mean? Was this article posted solely for the purpose of advertising Veribank?.. or is this an article to assist in picking which stocks/banks to invest in?
I have no interest in Veribanc or Weiss ratings or anything that I recommend. If I had, I would have let you know because to do otherwise would be a breach of trust.
But this also allows me a cop-out. I can't, and won't, vouch for either organization because all I know about them is what you can read from their websites yourselves.
My purpose was twofold:
1) Let you know that you are responsible for picking the bank you entrust with your money. They are not all created equally. Some are good and some are bad. Unfortunately, the FDIC insurance has hidden this variable aspect from most people. Why? Because a higher rate of interest would clue you in to the fact that the offering bank was probably running shady deals. That feature left with the creation of the FDIC and so now the average person is left without an eeasy way of assessing the risk vs. safety of any given bank. That is the very essence of moral hazard.
2) Get you to realize that "federally insured" is not quite the all-inclusive safety net you might think it is. Please read this Martenson Report on the FDIC and if you have any more questions, post them and I'll try to respond in a timely manner.
A few months ago I completed an exercise of going through a number of UK banks looking at the fundamentals.
First look at the Consolidated Balance Sheet and note the value of Derivatives in both the asset and liability columns. Assume that the asset value may not be realised and that liability will have to be. See how that affects the net assets.
In many cases, adjusting the derivatives values in this manner makes the bank technically insolvent. Go figure!
Finally call the bank and ask them what their lending ratios are. Most are 4 to 6 times. The Bank I ended up choosing had no exposure to Derivatives and a lending ration of 0.33.
A postscript. The UK Government made a big thing of ‘improving’ the cash deposit protection of 35,000 pounds. The small print shows that this covers a bank’s illiquidity NOT insolvency. We are all on our own out there - only knowledge will protect us.
