With all the gloom and doom in the banking industry, it's no surprise that consumers are scared about the fate of their deposits. But before stashing your cash under the mattress, there are some ways to investigate the health of your bank.
Though few consumers enjoy poring through financial data, taking matters into one's own hands might be the best way to protect your cash, says Andrew Karolyi, an investment-management scholar and finance professor at Ohio State University.
Banks' troubles today stem from bad loans and a lack of capital to cover those risky assets. Essentially, borrowers are unable to afford the big mortgages and other debts they took on and are becoming delinquent or defaulting. Banks are left holding the bag of sour debt and devalued assets -- hence the billions in writedowns and charge-offs over the past few quarters, followed by a scramble to raise capital.
There's no clear-cut way to determine which banks will survive the current economic downturn and which will go under. It depends on a slew of factors -- including regulatory moves, risk mitigation, investor confidence and the health of the consumer -- that are impossible to predict with any certainty. But a quick check of a bank's financial statements, stock performance and preparations it has taken for further losses can provide clues about how well or poorly a bank is faring."You can't call it conventional or common wisdom in terms of how to really judge the financial health of the bank," says Karolyi. He adds that "as much as it's interesting to look at the bottom line number," consumers need to "look beyond that to see what kinds of actions or consequences the bank will be taking."