Could your bank be the next to fail?

By Michael Brush

Correction: An earlier version of this column incorrectly included First West Texas Bancshares in a list of banks and bank holding companies with tier one capital ratios of less than 6%. Federal Reserve regulators do not apply the 6% test to bank holding companies such as First West Texas Bancshares with total assets of less than $500 million. The Fed instead applies a series of other tests, which First West passes.

When images of nervous bank customers lined up to pull money out of struggling IndyMac (IDMC, news, msgs) were flashed across TV screens earlier this week, I'm pretty sure a lot of people had the same thought I did: Is my money secure?

Here's the good news, according to the government: "The overwhelming majority of banks in this country are safe and sound." according to Sheila Bair, the chairwoman of the Federal Deposit Insurance Corp., which insures bank deposits. "The chance that your own bank will be taken over by the FDIC is extremely remote."

• Talk back: Are you worried about your bank's health?

The bad news is, that's exactly what a lot of people thought about IndyMac just a few months ago.

In a sign of some serious problems ahead, the FDIC is gearing up big time, adding 60% more staff members qualified to deal with bank failures. And privately, the agency keeps its own list of banks it thinks could need a bailout.

That list that now contains about 90 names.

• Video: IndyMac's collapse spreads worry

To analysts who follow the banking sector, it's no surprise the FDIC is preparing for a lot more work. As losses from bad loans of all kinds -- not just subprime mortgages -- pile up in this weak economy, we're going to see "a broad number of institutions get into trouble," predicts Christopher Whalen, the managing director at Institutional Risk Analytics. "We are still pretty early in the adjustment process."

Mind you, even if 100 to 150 banks fail -- as many analysts expect -- that's a small number of the more than 9,000 banks and thrifts in the country. But it's up from a handful per year in recent years.

Below, I offer a list of banks, bank holding companies and thrifts that appear to be closest to getting into trouble, based on a measure that regulators use.

Protect yourself

Before we go there, it's important to remember that it's fairly simple to protect your money. Just make sure that you keep your cash at enough banks so the money is protected by FDIC insurance.

The FDIC insures deposits of up to $100,000 per depositor per bank -- $250,000 for most retirement accounts. (Amounts over $100,000 may be covered if regulators can raise enough cash by liquidating a failed bank's assets. But don't count on it.) The FDIC does not insure money in stocks, bonds, mutual funds, life insurance policies or annuities, even if you bought those investments through an insured bank.

Surprisingly, about 37% of the nation's $7.07 trillion worth of deposits at the end of the first quarter was uninsured, according to a Wall Street Journal report. One reason may be that a lot of people have several accounts at a single bank and don't realize that it's the sum of all their deposits at a bank that counts -- not how much they have in any single account.

Many businesses and local governments also probably exceed the $100,000 limit.

To verify that your accounts are FDIC-insured, you can try the agency's consumer hot line at 1-877-275-3342 or use its deposit insurance calculator.

Banks close to the edge

Which banks or thrifts look like they are the closest to this sort of trouble? Well, probably not the biggest names of the subprime mess. Citibank (C, news, msgs), Bank of America (BAC, news, msgs) and JPMorgan Chase (JPM, news, msgs) have had tons of write-downs of bad loans, but they have big resources and are too big for the government to let fail.

Another bank with subprime exposure, Wachovia (WB, news, msgs), seems to have enough capital for now. But JPMorgan Chase analyst Ian Jaffe suspects a recent $8 billion capital infusion may not keep the bank in the safe zone. (And it may have other problems; regulators raided Wachovia Securities offices Thursday.)

To find key names, I turned to analysts at SNL Financial, a research group that tracks trends in the sector.

To be clear, there's no easy way to predict which banks are about to fail, much less face an IndyMac-like run. But one simple way to figure out which banks may be closer to the edge is by using the number that regulators use: the tier one capital ratio.

This yardstick measures how much "core capital" a bank has compared to assets such as loans and securities. First, you determine how much a bank's assets exceed its liabilities. That amount is divided by the bank's level of assets, weighted for their level of risk. Credit card loans, for example, are considered riskier than real-estate loans backed by property.

You can think of the tier one ratio as a measure of how much of a financial cushion a bank has. "If a bank has enough room and it has a little run on deposits or some problems with its asset quality, it can absorb that," says SNL's John McCune.

If not, a bank may wind up like IndyMac.

Continued: Taken over by regulators

 1 | 2 | next >