Questions, answers about bank failure

CHARLOTTE, N.C. -- The government's seizure of IndyMac Bank raises consumer concerns about whether their banks might be next.

While it is unlikely the nation will see thousands of banks fail as they did during the savings and loan industry collapse in the late 1980s and early '90s, analysts predict there will be more battered financial institutions that are unable to survive in today's marketplace.

Here are some questions and answers about the government's role when a bank fails and if other banks are at risk:

Q: Why did the government seize IndyMac's assets?

A: Regulators closed IndyMac after customers began a run on the lender after the June 26 release of a letter by Sen. Charles Schumer, D-N.Y., urging several bank regulatory agencies to take steps to prevent IndyMac's collapse. In the 11 days that followed the letter's release, depositors took out more than $1.3 billion, regulators said.

In a statement Friday, Schumer said IndyMac's failure was due to long-standing practices by the bank, not recent events.

The bank spent two weeks trying to reassure customers that it was not near default, including announcing that it had stopped accepting new loan submissions and planned to slash 3,800 jobs, or more than half its work force.

Q: What happens when the government takes over a bank?

A: In such a scenario, called a conservatorship, a bank's regulator takes control of the company and oversees its operations. The move is to maximize the value of the institution for a future sale and to maintain banking serv- ices in the communities the bank served.

Q: Is my bank at risk?

A: John Bovenzi, the former chief operating officer of the FDIC put in charge of IndyMac, reassured consumers late Sunday that bank failures have been rare in the past, and that if more banks do fail, the government has enough in reserve. According to regulatory policy, there is no advance notice given to the public before a bank's assets are seized by federal regulators.

"I think the important point to make is that, historically, only a very small percentage of the banks on our problem banks list ever failed," Bovenzi said on CNN. "While there are 90 banks on the list, there would be no expectation that 90 of those banks would fail."

According to the FDIC, IndyMac is the fifth U.S. bank or thrift that has failed this year. In 2007, three financial institutions failed.

Q: How can I make sure my money is safe?

A: All deposit accounts worth $100,000 and less are automatically insured by the FDIC. Many retirement accounts, such as IRAs and 401(k)s, are insured to $250,000 per person. But since it's a person's aggregate deposits, and not their individual accounts, that are insured, any amounts over $100,000 deposited at any one bank are not covered.

In a joint account, each depositor is insured up to $100,000.

The FDIC has information about its insurance on its Web site, at www.fdic.gov/deposit/ deposits/insured/yid.pdf.

While keeping more than the limit at any bank means taking a chance, the risks can be bigger with smaller companies if they're heavily exposed to mortgage and other debt in this downturn.

Q: How much money does the FDIC have?

A: The FDIC has nearly $53 billion in insurance funds. Beyond that figure, Bovenzi said, the FDIC would have go to other banks to raise more money, adding that in such a case, consumers could expect to see some of the costs passed on to them in the form of higher fees.

The estimated loss to the FDIC resulting from IndyMac's failure is between $4 billion and $8 billion.

Q: How big does FDIC like to keep its deposit insurance fund?

A: The FDIC board of directors has set a designated reserve ratio of 1.25 percent. That means their "target" balance for the fund is 1.25 percent of estimated insured deposits. As of March 31, the fund was $52.843 billion and insured deposits were $4.431 trillion, which resulted in a reserve ratio of 1.19 percent, 0.06 percentage points below the board's target. If the fund falls below 1.15 percent of estimated insured deposits, the FDIC is required by law to adopt a restoration plan that will bring the reserve ratio back to 1.15 percent in five years.

Q: Do banks have to pay into the deposit insurance fund?

A: Yes. The total amount depends upon the assessment rate assigned to the institution and the size of its assessment base, which is roughly equal to an institution's total domestic deposits. Assessment rates are assigned to institutions based upon the risk they pose to the fund, and currently range from 0.05 percent to 0.43 percent.