Banking On Knowledge

Bank safety has recently become a hot topic largely due to the unexpected failures of a few large financial institutions earlier this year, and more recently, Tri State Bank in Elkhart, Kansas.

While financial intuitions will continue to stress that banks are indeed safe, we understand that biased opinions are more difficult to trust. For that reason, we want to arm you, our readers, with the information necessary to decide for yourselves whether your bank is operating in a safe manner.

 While all banks assume a certain amount of risk, it will ultimately come down to what level of risk you, as a customer, feel is acceptable.

Here are five questions to ask your financial institution to decide for yourself: “Is my bank safe?”

1. Bank ownership: Is it publicly or privately owned?

Publicly owned banks are similar to other publicly traded companies where you can simply buy and sell shares, usually based on their income performance. By their nature, these types of businesses are motivated to take more risk. Examples of publicly owned banks include Wells Fargo and Commerce Bank.

Privately owned banks are usually closely held, often by small groups of investors or even family members. For example, Western State Bank is privately owned, with the same family ownership since 1973. Private banks are not at the mercy of shareholders’ demand for profit. Privately owned banks can also take an aggressive approach in terms of risk, but those banks don’t usually see long term success. 

2. What is this institution’s loan to deposit ratio?

A bank’s loan to deposit ratio can tell you how much of the bank’s money is set aside for stressful economic periods, and how much is tied up in loans to customers. The more loans an institution has, and the less selective they are in who they are willing to loan money to, the more risk they carry. (In addition, if your bank automates loans, allowing individuals to apply and receive loans online rather than having a human review the applications, they are assuming more risk.) Consider this: How much of your own money would you want set aside for unexpected events? Western State Bank has chosen to allocate 30%, resulting in a 70% loan to deposit ratio. Some banks hold back far less than 30%, and others may not hold any back at all.

Ask your institution about its loan to deposit ratio, and keep in mind that a high ratio could indicate a riskier operation. The lower the better.

3. What is this institution’s capital ratio?

The capital ratio deals with the business side of banking. It is important to remember that banks are businesses, too. Like any business, banks must make profits in order to stay in business.  The capital ratio tells us how much of the bank’s own money – which comes from profits, not customer deposits—bank ownership is willing to risk (the amount it could lose) if the bank were to fail. Publicly owned banks tend to focus on distributing profits to shareholders, while privately owned banks usually prioritize safety and risk management. The FDIC requires that banks have at least a 6% capital ratio. A higher number is safer, because it leaves more money in the business and indicates that the bank is in a better position to deal with unexpected losses. Western State Bank routinely maintains a 10.5% capital ratio. 

Ask your institution about its capital ratio; in this case higher percentages offer more protection against potential bank failures.

4. Who leads this bank? And who holds them accountable?

Like all business operations, the competency and consistency of leadership directly impacts the success of an institution.  Has your bank had frequent or recent turnover in leadership? Is your bank’s management team competent? Western State Bank customers can rest assured that our bank has had the same family ownership and supervision for the past 50 years. Bank President Tyler Whitham is the third generation family owner, and his father, former Bank President Jeff Whitham, is still actively involved in board decisions. In addition, banks routinely undergo examinations by the FDIC and the Office of the State Bank Commissioner to ensure accountability. Western State Bank also employs an internal audit team, which operates independently of bank management, to offer further protection to account holders.

5. How can this bank ensure that my deposits are protected?

FDIC insurance protects account holders from losing funds if the bank were to fail. Each depositor is covered up to $250,000. Learn more about FDIC insurance here. For any funds that exceed the FDIC insurance limits, some banks offer additional solutions to ensure account holders’ money is protected. For example, Western State Bank uses a service that places excess funds in certificates of deposit through a network of partner banks. This protects all funds that exceed FDIC insurance limits and prevents account holders from having to spread money around to different banks. If your funds exceed FDIC insurance limits, be sure to ask your institution how they plan to guarantee protection.