Bank depositors likely safe from Bear Stearns fallout

NEW YORK - The credit crisis has done more damage on Park Avenue than on Main Street, but the near collapse of investment bank Bear Stearns Cos. Inc. raises the question of whether Wall Street's troubles could spread to commercial banks and ordinary depositors.

The short answer: Deposits in commercial banks are considered safe, barring catastrophe, and they are protected by federal insurance if a bank fails.

"The average guy on the street has nothing to worry about," Gerard Cassidy, a banking analyst at RBC Capital Markets Corp., said. "There should be no panic whatsoever."

Individual accounts at a commercial bank are insured by the Federal Deposit Insurance Corp. for up to $100,000. That includes checking and savings accounts, trusts, and IRAs or certificates of deposit. Some retirement accounts are insured up to $250,000.

Bear Stearns, an investment bank that does not cater to consumers, is not insured by the government. An investment bank aids in the sale of securities, facilitates corporate mergers and reorganizations, and trades investments for its own accounts.

If you have more than $100,000 in a commercial bank, you still can get coverage a couple of ways, including by simply opening accounts at other banks. The insurance limit would apply separately at each bank.

Commercial banks would have to fall far before they would match the 1991 recession, when 502 banks failed in three years. By contrast, only three U.S. banks failed last year, and none failed the previous two years, according to the FDIC.

The FDIC was monitoring only 76 "problem institutions" last year, down from 1,430 in 1991.

Still, bank failures probably will increase through 2009, Anthony Davis, an analyst at Stifel Nicolaus & Co. Inc., said. But "based on what we're hearing from various regulatory agencies, they don't think there will be a surge in failures."

But banking analyst Meredith Whitney warned yesterday that investment-bank stocks could fall by as much as half, and consumer banks such as National City Corp., of Cleveland, have seen their stocks slide, too, as the banking world shuddered.

What if the regulators are wrong and scores of banks begin to fail? How would the FDIC possibly cover all of them?

As of December, the FDIC was covering $4.3 trillion in insured deposits with a fund of $52.4 billion, for a reserve ratio of 1.22 percent. That sounds scant.

But that is actually a solid base: The FDIC's reserve ratio sank as low as a negative 0.25 percent in 1991, and depositors with accounts at failed banks still were covered.

The FDIC assesses banks an insurance rate based on how risky it judges the banks to be. The existing rates range from 0.05 percent of insured deposits for the least risky to 0.43 percent for the most risky. Should the FDIC need to, it could increase those rates.

Just last week, the FDIC's staff recommended that it maintain the existing rates, saying that 99 percent of the institutions it insures are well-capitalized - that is, not too risky.