Thursday, October 30, 2008
Is your Bank really in a Hot Water?
The current financial turmoil has left banking customers wondering: 'How safe is my bank?' When most people retire, one of the first things they think of is protecting the income they have worked all their life for. After all, you want to protect every last dollar you have earned right? No bank can any longer claim to be fully secure, and RBS is perhaps in the weakest position. According to City analysts RBS has the second biggest "funding gap" - the amount of money the bank needs to raise in the wholesale markets over the next few months – of all UK banks after HBOS. The gap is £161 billion and, considering the wholesale money markets are effectively closed, this makes RBS's position precarious.
Have you ever asked yourself what happens to your hard earned income when it is placed in a CD? Not too long after your income is place into your CD, the bank loans that money to another source. That's right, it is loaned out! They will make 60 to 70 percent off of your deposit while you're promised 4 to 5 percent on your assets. Last year RBS was worth more than McDonald's, but its share price has fallen from almost £6 to around £1 in the last 18 months. The shares lost one third of their value on Tuesday alone.
The only one of the big banks which has deposits worth more than its loans. No funding gap and absolutely rock solid. It is the world's largest bank and if you had to bet on your money being safe in one place, it would be with HSBC. As other banks watch their share price tumble HSBC goes from strength to strength. Despite the bank's exposure to the sub-prime mortgage crisis in the US, its shares appear to be on track to escape unscathed from the financial crisis.
The Federal Deposit Insurance Corp or FDIC only guarantees that 100,000 of your income is FDIC insured. However, certain retirement accounts are eligible to be insured up to 250,000. Now here is the million dollar question many of you want to know. What happens if the Bank FAILS? Contrary to what most people may think, Banks, at times, DO FAIL. Bank failures are rare but they still happen. According to the FDIC, there were 28 bank failures since October 2000!! Check out the link.
Well what happens to your money once a bank fails? I will be more than happy to tell you so let me explain. The account owners which are within the FDIC guidelines normally are able to retrieve their money rather quickly. Well, what about those retirees with over 100,000 or those IRAs over 250,000? Those with assets not covered by the FDIC will become creditors to the receivership of the failed bank. "The FDIC will then sell off the failed bank's assets and pay those account holders who were over the FDIC income limit, from the proceeds of that money. This process CAN TAKE YEARS. YES! It can actually take years to get all of your hard earned dollars back. Some of us dont have years or time on our side to retrieve all of our hard earned retirement income.
Barclays had to deny that it had requested extra capital from the government, a rumour that caused its share price to be hit hard. It has a relatively large funding gap but is a big bank that really should not run into any trouble. Its shares have been hammered in recent months but held up relatively well in the chaos of Tuesday, which is a sign that the market is relatively optimistic about its future as an independent entity.
If you need to find another place to park some or all of your money, you can compare interest rates online at Bankrate. Also, each week BauerFinancial publishes a free list of money market and CD rates offered by banks and thrifts that get at least 3 1/2 stars. Eisenberg discovered that Bankrate gave Citibank three stars -- not awful but not great either. Basic FDIC insurance tops out at $100,000 per customer, but it is possible to insure many times that amount at a single institution by setting up joint accounts and trusts.