August 7, 2020

How to Choose a Bank for Your Investments

Choosing a BankThe bank is probably the most important place where your money is concerned, and so of course you will want to be very cautious when changing banks or picking out a bank for the first time. It is important to compare aspects like interest rates, fees, and other terms and conditions between banks. But apart from that you should also look into the health of any bank that you are seriously considering. A bank failure can be a scary thing, and you will want to avoid it at all costs. Or, should it still happen, you will want to know exactly what your options are.


FDIC is Saving Grace for Banks

Luckily the Federal Deposit Insurance Corp is around to protect people in the event of bank failure. The FDIC was created by the United States Supreme Court to instill and maintain its citizens’ faith in America’s financial system. To do this the FDIC monitors the reliability of banks nationwide and it will insure up to $250,000 per customer. The FDIC website is a great resource when looking for a new bank. Along with tips and advice on investing it offers visitors the chance to authenticate any bank on the Internet as well as see any public financial information related to the specific bank.

In the Event of Failure

You deposited funds are safe in the event that FDIC closes down a bank, but there are other problems that can arise. The new bank doesn’t have to uphold the same terms and conditions that were established with your previous account. For example, the new bank can increase the early withdrawal penalty on certificates of deposit or lower the interest rate on your savings accounts and money market accounts. When a bank fails the FDIC will try to find another bank to take over. If one cannot be found then you will be left to find one on your own.

Factors to Consider

As mentioned before it is very important that you review a bank’s financial strengths and weakness before applying. You will want to make sure that the bank is financially healthy and that there is a good chance it will stay that way. Below are a few factors to consider in your search:

  • Enforcement actions – Sometimes the FDIC will take enforcement action on a bank when it is not following certain protocols, and this can happen for a variety of reasons. Statistically a bank has a much greater chance of failing if any enforcement action has happened, so this would be a wise thing to look into.
  • Total assets – Looking into the total assets of a bank will give an indication to how strong its banking power is. Typically smaller banks, such as ones with $500 million or less in assets, are more likely to be bought out or closed by the FDIC than bigger banks.
  • Stock price – Looking at the bank’s stock price over the previous six months is also a good indication of how the bank is faring. Often falling stock prices are a clue that the bank has financial problems in its future. The KBW Bank Index is a good comparison, and usually if a bank’s stock prices are falling faster than this index than fiscal problems are imminent.
  • Stable asset growth – Look through recent quarters and see if there are any changes in the bank’s assets. Both increasing too fast and decreasing too rapidly are signs that bank failure is coming. Of course you want there to be some growth in the assets from quarter to quarter, but the growth should be slow, steady, and stable.
  • Finding the Best BankConsider a report – Taking the time to sift through a bank’s financial information can be tedious and boring for a lot of people, and unfortunately this means many people are ill-informed before investing in a bank. There are companies out there compile, summarize, and clarify information relating to a bank’s fiscal health, and they are willing to sell this rating reports to consumers. It might be worth it to some people to purchase one of these reports, which will help them understand the exact risk of placing funds in a particular bank.