Recent bank failures around the country are causeing concern about the market as mixed messages of both caution and reassurance come when a recession is no longer a matter of possibility.
Depositors are insured, but financial experts caution that its time to tighten the belt for what may be a long recession cycle.
Area banks and credit union representatives say that most local money is protected.
Last week in a press release, FDIC Chairman Sheila C. Bair, addressed concerns over the IndyMac Federal Bank conservatorship created by the FDIC to continue to provide banking services in communities, by calling it a relative “non-event” for the 8,494 FDIC depository institutions.
“The chance that your own bank will be taken over by the FDIC is extremely remote,” she stated. “And if that does happen, you will continue to have virtually uninterrupted access to your insured deposits.”
Gary Bigler, president, Bremer Bank, International Falls branch, said the FDIC protects individual depositors with basic limits of $100,000 per institution, with an additional $250,000 per institution for IRAs. There is additional insurance coverage available for amounts in excess of the basic protection.
“If you are insured within the FDIC limits then there is nothing to worry about,” said Bigler.
With money market and other timed investments, Bigler cautioned against transferring money out of those accounts early, especially if a penalty would be assessed for early withdrawal. There are concerns with some investments during downtimes, however, and Bigler said that decisions regarding these accounts should be made in consultation with financial managers.
“The markets are down, but don’t try to time the market,” he said. “It is better to time your investments.”
Bigler noted that the coming weeks will continue to bring news of more failing banks and that it is the alternative real-estate loans that are driving the failures. He said that it is important to distinguish the true deposit based commercial banks from these troubled investment based banks.
“There are a number of banks hit hard, especially in the residential real estate area,” he added. “But the fact remains that the over all health of the industry is very solid.”
Traditional banking remains strong, he said, with capital levels as strong as they have ever been.
“Bremer and the other banks in town just stuck to basic products and the business of basic banking and are going to do fine,” said Bigler.
The signs of a recession were visible as early as 2005, said Bigler. Consumers were spending more money than they saved. Real estate sales and home equity lending were so strong that they added trillions to the economy, disguising the reality of a crunch recession.
“The real estate value was a runaway freight train and was going to crash,” he said. “Bremer has had a great two years and we have stuck to the basics of banking.”
Down markets do offer some investment opportunities as downturns rarely impact all sectors hard at the same time, and Bigler encourages sticking with a balanced portfolio based on individual risk tolerance.
The National Credit Union Association insures depositors at the same levels as the FDIC.
Dale Johnson, president/CEO, TruStar Federal Credit Union, International Falls, said the main concern for depositors is to make sure that accounts are structured to ensure that amounts over the basic insurance limits are also covered.
“TruStar can structure accounts to cover half million in deposits,” said Johnson. “We are 20 percent capitalized and have 20 percent reserves for every dollar.”
Bankers, the FDIC, www.fdic.gov, or the NCOA, www.ncua.gov, will offer updated information on account classifications to ensure funds are safe and sound.
Johnson said that it is unlikely that the current recession will bottom out in 2008 and recommends that a conservative approach toward personal finances. This natural cycle would typically run for three to five years, and he said that this cycle may run even longer.
“Do what you need to do to conserve cash and keep liquid,” said Johnson.
The government has been relying on consumers to spend their way out of the previous downturns, he added. Consumers, including small businesses, did this by taking equity out their major assets, namely their homes and savings accounts. For this cycle, he says consumers simply don’t have the money or the assets to leverage big spending.
“Don’t make large ticket purchases if you can avoid it,” he said. “There are a lot of enticements, and needs are needs, but not knowing what is going to happen means that this is good time for saving versus spending.”
Johnson notes that unforeseen events could bring the upswing back sooner. The end of the war, or with oil prices come down significantly are two such incidents.
“But it would need to be big to make it turn quicker,” he added. “That is a vision shared by a lot of folks.”
Traditional banks are operating business as usual, but with a more conservative approach to loans until the business cycle returns on an upswing, he added.
“That is the rule of thumb in the banking industry,” he said. “We are looking for a down payment and shorter repayment terms, with better debt income ratios, and less risky credits.”
