How to Find Out if Your Bank is Safety Rated Before You Become a Depositor

Is Your Bank Safe?

In recent years, it seems that financial institutions are struggling. Depositors are concerned about their savings and asking whether or not their bank is safe.

While the Federal Deposit Insurance Corporation keeps a secret “watch list” for banks, Bankrate.com, a popular online financial resource, uses a public system that measures the stability and safety of U.S. commercial banks and credit unions. Review the Safe & Sound Bank Ratings at Bankrate.com to learn your financial institution’s rating.

How the Bank Risks Your Capital

When a bank approves a large loan for a customer, the cash for that loan comes from the depositors—everyday people who deposit their savings and monthly paychecks at that bank. While it might be advantageous to borrow money from a bank with a low interest rate, it is likely not as advantageous to deposit money at that bank, as it is lending out the cash that you deposit on a regular basis.

According to Simon Black, founder of Sovereign Man and international investor, very little of depositors’ funds are kept in the reserve. To prevent losing your money, major financial institutions are required to have resolution plans that ensure the investments of the bank will not put depositors at risk.

To help protect the depositor, one of the jobs of The Federal Deposit Insurance Corporation and the Federal Reserve Board is to identify weaknesses in resolution plans at major banks. For example, Bank of America, JP Morgan Chase and Wells Fargo, when the findings revealed that the plans “would not facilitate an orderly resolution under the U.S. Bankruptcy Code.”

The Federal Deposit Insurance Corporation and the Federal Reserve Board require regular liquidity test of financial institutions. Each bank’s individual plan must submit their improved resolution plans and must address all shortcomings identified in the following areas:

Capital
Liquidity
Governance mechanisms
Operational capabilities
Legal entity rationalization
Derivatives and trading activities
Responsiveness

Read more about the resolution plan assessment, which is updated regularly by the Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation.

About the Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act, referred to as the Dodd-Frank Act, helps to ensure a financial institution’s failure will not adversely affect the financial stability of the United States. The resolution plan process ensures that weaknesses are (1) identified and (2) properly resolved.

To date, the following progress has been made as a result of the Dodd-Frank Act:

Financial institutions and affiliates are in compliance with the International Swaps and Derivatives Association (ISDA) 2015 Universal Resolution Stay Protocol. Financial institutions have secured a substantial amount of long-term debt, which would be used to absorb losses in a bankruptcy proceeding.
The firms have taken steps to ensure that, in the event of a dissolution, affiliate companies can still use the resources of the failed company, helping to ensure that failure of one subsidiary will not spark a failure of many.

If you’re concerned about securing your funds at a bank, consider investing in alternative methods (gold, for example).