BestCashCow released its list of the Top 10 Safest States to Bank. The list, compiled from FDIC data ranks the ability of banks in each state to absorb delinquent loans using a metric called the Texas Ratio. History has shown that banks with high Texas ratios are more likely to close. The states below have, on average, the banks with the lowest Texas ratios.
The Top 10 Safest States to Bank Are:
- North Dakota
- New Hampshire
- Rhode Island
For the analysis and to remove distortions from mega-banks, only banks with less than $10 billion in assets were considered.
As in previous years, banks from the mid-West and the Northeast dominate the list. Both of these regions avoided the worst of the housing crash. States like North Dakota, Alaska, Iowa, and Nebraska have benefited from surging commodity prices and a resurgent domestic oil market. The Northeast, mindful of the banking crisis in the 1980s, avoided the worst of the mortgage and sub-prime excesses from 2002-2005.
Why Does Bank Safety Matter?
Even with FDIC coverage, it’s important to know the general safety of your bank for several reasons. In 2013 alone, thirteen banks have failed through May 14. In the event of a bank failure:
- Not all deposits are covered. According to the FDIC, up to 20% of deposits in U.S. banks are not covered by FDIC insurance because deposits are over the $250,000 limit. In the event of a bank failure depositors can, and have lost money.
- Great rates might not be honored. Banks that fail are often acquired by stronger institutions. But these institutions do not need to honor prior CD rates and other terms from the failed bank.
- It can be inconvenient. While the FDIC generally moves quickly when taking over a failed bank, there can be a several day disruption and lack of access to cash. Depending on the timing this could be a major or minor inconvenience. A depositor of a failed bank may also find themselves a member of another institution that they never chose and prefer not to bank with.
Then there is the small, yet real specter of a massive financial collapse, like what nearly happened in 2008. If one or two of the too-big-to-fail banks go under, the government may not have the cash to prop up other banks. This is essentially what happened in Cyprus, where massive bank failures bankrupted the government. Despite providing deposit insurance, Cyprus officials considered forcing losses on insured funds before the public outcry forced them to backpeddle. There are over $7 trillion in insured deposits and the government does not have the money to insure even half of it with today’s high public debt.
How to Check the Safety of Your Bank
Even if you live in one of the safest states, it’s wise to check the safety of your bank. There are several ways to do this. Sites like Bauer Financial offer ratings of every FDIC insured bank in the country. BestCashCow provides financial data and guidance on every FDIC insured bank and NCUA insured credit union in the United States.
Beyond checking on the health ratings of your bank or credit union, be sure to stay below FDIC or NCUA insurance levels.
No depositor has ever lost money from funds covered by FDIC or NCUA insurance. But housing values had never dipped on a national basis since the great depression until 2008. It pays to spend a few minutes understanding the financial position of the bank that you trust with your money.
Next week we will publish a list of the 10 Least Safe States to Bank.