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How Does The Banking Crisis Affect You?

Advice for everyday people on how to keep their money safe

September 18, 2008

Personal Finance • Economists' Panel Sees Prolonged Recession • Getting A Small Business Loan in Bad Economic Times • Jobless Rate Spikes in October • Monthly Job Cuts Hit Five-Year High • Business Economists See More Signs of Recession • What's Ahead For the Economy? • Consumer Confidence Plunges to Record Low • Bankers See Recovery in Second Half of 2009 • Autumn Has Long History as Financial Disaster Season • Finding a Job Takes Longer in Slow Economy • Baby Boomers Scramble to Reassess Future • What's Your Recession Game Plan? • Study Finds Racial Disparity in Retirement Savings • New York Threatens to Prosecute AIG for Fraud • Inflation Not a Factor in September • Retirement Postponed for More Americans • Economic Worry Supplants Terrorism Fear • Wall Street Leaders Missing In Action • Doctors Worry About These Stressful Times • Financial Meltdown Takes Toll on Consumer Confidence • Economic Turnaround Will Take Time • Retirement Plans Hammered in Credit Squeeze • Fed Takes Another Step to Bolster Credit Market • Economists Offer Plan for Stabilizing House Prices • House Passes Bailout Bill; Bush Signs Into Law • Senate Expected to Pass Bailout Bill • FDIC Seeks Increase in Deposit Coverage • Voter Anger Rattles Congress; Bailout Fails • Congress Agrees On Compromise Bailout Bill • Somber Washington Prepares for Bailout • Deal Or No Deal: What The Bailout Means To You • FDIC May Need Additional Funds if Banks Keep Failing • Which Type of Money Market Account Is Right for You? • How Does The Banking Crisis Affect You? • Lehman Files Largest Bankruptcy in U.S. History • Why Individual Investors Shouldn't Buy Individual Stocks • Bear Stearns to Pay $28 Million to FTC for Abusive Lending Practices • When Should You Sell Exchange Traded Funds? • Has the Bear Market Hit Bottom Yet? • How Do You Survive a Bear Market? --- • More Personal Finance News

Wall Street professionals aren't the only ones wringing their hands these days. The recent bankruptcy of Lehman Bros., coupled with mergers and takeovers involving banks has a lot of consumers concerned about the safety of their bank accounts, mortgages and retirement funds.

In response, the American Bankers Association has compiled the following Q&A series:

Q. Where is the safest place for my money right now?
A. The safest place for your money is in the bank. It's earning interest, it's FDIC-insured and it's accessible.

Q. How will the recent failure of Lehman Bros. affect me?
A. Unless you invested money with Lehman, you will not be affected. And if you did, Barclays Capital has announced that it plans to acquire the U.S. brokerage arm of Lehman, so all customers should be protected. Even if Barclays had not agreed to acquire Lehman Bros. brokerage, customers would still get back all the securities that are registered in their name and further protection would have been provided by the Securities Investor Protection Corp., which could have provided additional funds to satisfy each customer's claims up to $500,000. Of course, there will be economic factors that will affect us all, but Lehman is an investment bank, not a commercial bank.

Q. What's the difference between an investment bank like Lehman and my bank?
A. Investment banks operate differently from commercial banks and thrift institutions. Their primary purpose is to facilitate the sale of stocks and bonds. These Wall Street firms operate as advisers and agents for companies that want to raise capital, often by issuing more stock or other securities. Commercial banks and thrift institutions take deposits for checking and savings accounts from consumers and businesses. These deposits are insured by the FDIC for up to $100,000 per depositor per insured bank and up to $250,000 for retirement accounts. These banks lend this money to consumers and companies for autos, homes, business equipment, etc.

Q. Should I be worried about the health of my bank?
A. With 98 percent of nation's 8,500 banks considered "well capitalized" -- the highest designation possible -- the possibility of your bank being taken over by the FDIC is extremely remote. And if it did happen, you would continue to have uninterrupted access to your FDIC-insured deposits.

Q. How do I know I won't lose money?
A. Customers' bank deposits are protected. Not one penny of insured savings has ever been lost by a customer of a federally insured bank. Deposits are insured by the FDIC for up to $100,000 per depositor per insured bank and up to $250,000 for retirement accounts. If you need more coverage, your banker can explain your coverage limits and give you options to ensure that all of your deposits are insured.

Q. What about lists that predict the next bank failures?
A. The only list that matters is the one from the FDIC, which has a more thorough and complete picture of a bank's safety and soundness. It's important that this list be kept confidential, because, on average, the vast majority (87 percent) of banks on this list come back to healthy status.

Q. Will I still be able to get a mortgage, credit card or other loan?
A. People with a good credit history will continue to have access to mortgage, credit card and other types of loans. Appropriately, most banks are taking steps to limit risk in the current economic environment, so they have tightened lending standards. That's why it's more important than ever to monitor your credit report and keep your credit score in the "good" to "excellent" range.

Q. How does the recent takeover of Fannie and Freddie affect bank customers?
A: If you already have a mortgage, nothing will change. If you are thinking of buying a home or refinancing a mortgage, the government takeover will help stabilize rates. With explicit government backing, Fannie and Freddie can continue to buy mortgages, hold them in portfolio or sell them into a functioning mortgage market. Mortgage rates nationally have already come down, making it easier for homebuyers to qualify and for homeowners to refinance high-priced loans.

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