Banking July 28, 2008, 12:01AM EST

Is Your Bank Safe?

The collapse of IndyMac has banks in customer-reassurance mode. But it just points to the lack of consumer information about bank solvency

By Avi Salzman

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From Wachovia, an example of a bank seeking to assure customers that it is sound.

Nothing says hard times like people standing outside a bank demanding their money. IndyMac Bancorp's (IDMC) failure and the resulting chaos were reminiscent of Depression-era bank runs even if the country's economic condition doesn't marginally resemble that era. But in an economic slowdown with few visual reference points—what does a subprime loan look like anyway?—IndyMac's failure carried a clear message for some: Stick your money under the mattress.

Banks and federal officials have worked diligently in recent days to make images of bank runs vanish. Some banks are now issuing tellers talking points to use to reassure customers that their money is safe, housed by an institution that is well-capitalized. BankAtlantic, a Florida-based regional bank, even sued an analyst after he pegged its parent BankAtlantic Bancorp (BBX) near the top of a list that could be "next" after IndyMac. "A falsehood, when widely circulated, becomes its own truth," the bank's lawsuit says.

But critics contend that a dearth of information will only make customers more suspicious and open the door to dangerous rumors. Since IndyMac's failure, (BusinessWeek, 7/23/08) everyone from Treasury Secretary Henry Paulson to bureaucrats at the Federal Deposit Insurance Corp. have hit the media trail to reassure depositors their money is safe. Their chief message is built on the federal guaranty behind every deposit up to $100,000, even in cases where a bank collapses. Joint accounts, retirement accounts, and trusts are also insured, up to a limit.

FDIC's Mixed Signals

But even as they explain the process, regulators are not willing to tell consumers everything. For instance, the FDIC compiles a quarterly watch list of troubled banks; there are 90 (out of 8,494 FDIC-insured banks) currently considered to be on shaky financial footing. The agency assesses each bank's capital position, the quality of its assets, and its management team, its earnings, its liquidity position, and the bank's sensitivity to broader market forces.

That list "is going to grow longer, given the stresses we have in the marketplace, given the housing correction," Paulson said on July 20 in an interview with CBS's Face the Nation. Just don't ask for the names of any banks on the list. The FDIC cannot discuss which firms are in danger of failing, given that the agency collects proprietary data from each bank and says it would be unfair to use the information to expose them publicly. Such a release could also cause undue alarm, says FDIC spokeswoman Lajuan Williams-Dickerson, because "most banks on the problem list are very unlikely to fail."

To some consumer advocates, that position seems to contradict the agency's stated goal of increasing consumer awareness. "On the one hand, the FDIC is promoting consumer education and empowering people," says Joe Ridout, a spokesman for Consumer Action, a national consumer education and advocacy group. "But on the other hand, the FDIC is withholding the most critical piece of information." FDIC officials said the agency makes available reams of data that customers can use to determine whether their bank is healthy.

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