There's no need to worry about money in banks

The image of people standing in long lines outside a bank trying to get their money out is not one which encourages optimism about the economic condition of our nation, but at the same time it is not one which should cause pessimism.
 
The reality is that some banks fail every year, in both good and bad times. The issue is sometimes poor management or outright fraud and has nothing at all really to do with economic conditions.
 
Perspective is important. For example, in the 1980s and 1990s more than 700 savings and loan institutions were forced to close in what became known as the savings and loan crisis. That was truly a difficult time, one that was resolved only after taxpayers covered tens of billions of dollars of losses.
 
While that was a big hit for taxpayers, one that shouldn't have been necessary, the financial system recovered and the nation moved forward.
 
Compare that with this year when only a small number of lending institutions have failed, the most notable of them recently being IndyMac Bank, based in California. Part of the blame for that failure is being put on a "bank run." When depositors became aware of the shaky condition of the bank, they began withdrawing deposits in large numbers.
 
The bank could not meet all these demands on a short-term basis so it was closed and put under control of the Federal Deposit Insurance Corporation (FDIC), which is responsible for protecting depositors. That, of course, only fed the frenzy of people wanting their money.
 
The run on the bank was an understandable reaction to bad news and fears - no depositor wants to lose their money - but the problem is that it actually worsened the situation. The bank might have survived and recovered if there had not been a panic. Trying to convince depositors to restrain their fear is, of course, nearly impossible. Fear is a powerful motivator for action.
 
This is one reason why it is important to be cautious in reporting on the condition of banks. Even healthy banks can be severely hurt by a run should suspicions arise among depositors about the financial health of the institution.
 
Still, at this point IndyMac Bank is the exception, one of five banks to fail so far this  year. But there were troubling aspects to the failure, and others that have been taking place.
 
Some of the same causes that were involved in the savings and loan crisis of the past are being repeated - bad financial practices which result in improper and insecure lending, especially in the real estate market.
 
Apparently, the lessons of the past were not learned. Something needs to be done about that, including holding those responsible for fraud accountable.
 
The bottom line for most of us, however, is how do we make sure we can get our money back when we put it in a bank. Fortunately, there need be no concern about this at all - whether a financial institution fails or not - if a couple of precautions are taken.
 
First, make sure the institution where you put your money is covered by federal deposit insurance. That guarantees you will not lose money up to $100,000 per person for most types of accounts.
 
Second, If you have more than $100,000, make sure to put the additional money in an entirely separate institution so it too will be covered.
 
If you are unsure if you are protected, just ask your bank.
 
This protection - which is re-enforced by we taxpayers who guarantee payment if necessary - is the result of bank failures during the Great Depression of the 1930s. Take advantage of it, then you won't have to worry about standing in a line hoping to get your money back. You can relax in the assured knowledge your money is safe.


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Terry Ross is director of The Sun's News and Information Center. E-mail him at tross@yumasun.com or phone him at 539-6870.