The Housing Chronicles Blog: Is your bank going to fail?

Monday, July 28, 2008

Is your bank going to fail?

I got an email from the very popular finance blog Bankaholic.com today about how to predict if your bank is about to fail (I'm with Wells Fargo, so I still feel pretty safe since they didn't do sub-prime mortgages and would only lend up to 80% of available equity with home equity lines and loans). Here are Bankaholic's top 3 signs your bank might be in trouble (other than the police being called to stop fights between people in line, of course):

1) Is your bank offering outlandishly high CD rates and savings rates?

Banks that offer high interest rates are desperate. All banks get a lot of their capital through brokered deposits. Professional money brokers are paid commission to go out and solicit deposits for the banks. HOWEVER, under Section 29 of the FDI Act, implemented by Part 337 of the FDIC Rules and Regulations, banks that are deemed “under-capitalized” by federal regulators are restricted from accepting brokered deposits. Instead, banks in trouble need to entice deposits from individuals by offering exceptionally high rates.

2) Does your bank lend heavily in California, Florida, or Las Vegas?
These were the hottest real estate markets in the last few years, but what goes up must come down. These markets are now seeing huge declines in property value and increases in foreclosures. For example, PNC Bank is actually holding up quite well because they do not do business in these areas.

3) Is your bank being slaughtered on the stock market?
Institutional stock traders, mutual funds, and hedge funds know what they doing. They pay analysts heaps of money to review balance sheets of banks... About a week before they went under, I did a story pointing out that Indymac Bancorp had become a penny stock. Indymac was offering an exceptionally high 4.45% APY 1 year CD at that time as well. Oh, and to make things worse, Indymac’s core business was financing ALT-A home loans in California! TRIPLE WHAMMY.

P.S. IndyMac FEDERAL Bank (the post-takeover name) is now offering 9-month CD rates of 4.15%. How did I know? A banner ad at Bankaholic.com -- but now you can be assured it's not going to fail (again).

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