By Don A. Childears, Pres/CEO, Colorado Bankers Association

Powerful photojournalism or a dramatic headline can influence our perceptions ways that don’t exactly mirror reality. The reality is: the commercial banking industry is strong, solid and vibrant; and has the tools, oversight and experience to weather the economic turbulence. As FDIC Chairman Sheila Bair put it on Monday, "Insured deposits are absolutely safe…the banking system as a whole is absolutely safe.” In this time of financial uncertainty, a factual explanation of the status of banks should allow depositors to rest assured that their funds are safe in an FDIC insured bank. There are multiple layers of protection.

“Real” banks actually are the safe haven to which people move funds during uncertain times. Don't confuse real banks – insured by FDIC, with “bank” in their name – with investment companies, mortgage companies and other entities that often are erroneously called banks. Because of consumers’ flight to safety, deposits in Colorado banks increased 8% last year and 33% over the last three years.

Banks are regarded as safe for a variety of reasons. Nationally banks have $1.36 trillion in capital, which increased significantly in 2008 despite the troubled economy. There is another $129 billion in reserves for future loan losses. According to FDIC, 8,385 banks in the U.S. are well capitalized and 91 are adequately capitalized while only 18 banks in the U.S. are undercapitalized. Respectively those categories account for 99.6% of all banking assets, .3% of assets, and .1% of assets. 

As of March 31 2008 Colorado based banks have a strong $5.3 billion in capital (over 10% of their assets) which is up 35% in the last three years. Loan loss reserves have remained steady at a solid 1.2% of assets over the last several years. Noncurrent loans (90 days past due) are a modest 1.46% of total loans. Admittedly loan charge-offs are up slightly but still are low and have been affected very little by the subprime crisis. While banks account for 58% of residential mortgage lending, they constitute only 18% of foreclosures in Colorado, since banks try to make sure the borrower in fact can repay the loan. Other lenders aren’t so cautious.

In addition to the stability in banks themselves, government examination and regulation provides another layer of protection. FDIC insured banks must meet high standards of financial strength and stability and FDIC regularly scrutinizes their operations to ensure the safeguards are met. Recently Richard Fulkerson, the state banking commissioner, who regulates state-chartered banks said, "The overall Colorado banking industry remains strongly capitalized and well positioned to handle any economic downturns."

Troubled banks are the rare exception, not the rule. Currently there are 90 banks nationwide that are considered troubled (out of 8,494). On average since 1982 only 13% of “troubled” banks actually failed.  Banks normally are sold to another stronger one but sometimes FDIC takes over and pays off depositors.

FDIC protects depositors dollar for dollar including principle and interest up to the insurance limit. Depositors are paid by FDIC within a few days. Since FDIC was created in 1933 no depositor has ever lost a penny of insured deposits. FDIC insurance that protects depositors is paid for fully by banks; no tax money is used. Five banks nationwide have failed in 2008, 3 in 2007, 0 in 2006 and 2005, 5 in 2004, and 3 in 2003 versus the 1,617 banks that failed in the 1980s and early 1990s. That was a difficult era for banks but the industry made necessary adjustments and continues today to provide the public with a safe place for their money. FDIC has $52 billion in reserves and another $5 billion will be added this year alone by banks.

Depositors are insured up to $100,000 per depositor per insured bank. Certain retirement funds such as IRAs are insured up to $250,000. Depending on how deposit accounts are titled in different ownership categories the basic $100,000 protection can be increased to larger amounts. Certain trust accounts are separately insured up to an additional $100,000 if certain conditions are met. Additional details are available at www.fdic.gov (see deposit category), and at 1-877-ASK-FDIC (or 1-800-925-4618 for hearing impaired).

While banks currently have issues they need to address, there is no other industry that has the financial strength to help resolve current crises. It was banks who purchased Bear Stearns and Countrywide to prevent their collapse. 

In an era when people are concerned more about the return of their money than return on their money we’re glad to report that banks provide both the safety of the deposited funds and the earnings on them. Funds are safe at your bank.