Bank Collapse Indicators and Preventive Measures to Consider
Bank Trouble: How to Spot a Sinking Ship
When it comes to managing your finances, a reliable banking institution is key. Most people have at least one account - either with a bank or a credit union - and considering a backup option is a smart move. After all, nobody wants to be caught off guard if their primary institution goes under. Despite their rarity, bank failures do happen. Two occurred last year, and another one kicked off 2025. While your money is typically safe in such situations, a bank failure can cause plenty of hassle. Funds might be unavailable for days, loans and mortgages could be sold off without your input, and it's a stressful ordeal you'd rather avoid. That's why it's essential to become an astute observer, spotting the early signs of a bank's impending failure.
Glaring Warnings: The Signs You Shouldn't Ignore
Cory Frank, the ace founder and CEO of Robora Financial, explains that bank failures generally follow a pattern: Losses lead to concerns about capital adequacy, which then provoke worries about solvency. These fears spark actions from customers, such as withdrawing their deposits, exacerbating the situation. Bank failures can be triggered by customer behavior itself, making it crucial to catch them early.
- Shedding Locations: Businesses in distress often cut costs by closing branches, as that concentration of resources becomes more attractive.
- Staff Cuts: If your bank starts letting go of employees, it's a strong indication to research its financial stability.
- Locked HELOCs: A sudden freeze on an old home equity line of credit could indicate the bank is scrambling to save its own skin.
- ** skyrocketing Rates**: If the rates your bank charges on loans suddenly skyrocket, it's a clear sign that the bank is desperate for income.
- Expired Loans: If your bank starts allowing existing business loans to expire, it could be a sign of an impending liquidity crisis.
- Sluggish Payments: If your bank delays paying interest or processing other payments, it might suggest that the bank is finding it tough to maintain sufficient cash reserves.
In extreme cases, banks will activate a so-called "Recovery Playbook" when failure becomes inevitable. This can include cutting or delaying stock dividends, selling off assets, and running aggressive deposit campaigns offering above-market rates in an attempt to slow withdrawal rates.
Self-Preservation: Shielding Yourself from Bank Failure
Always stay informed, advises Cory Frank. Check for any news about your bank or credit union that might set off alarm bells. Analyze financial statements, too, if you can: Download and scrutinize the institution's Call Report (for banks) or the NCUA 5300 report (for credit unions) to uncover any negative trends. But even the most observant among us can still be blindsided by a bank failure. According to Adem Selita, the shrewd co-founder of The Debt Relief Company, a bank can fail even when the economy is stable, if there are underlying issues within the institution itself.
However, banks are usually put through stress tests and checked for such problems to minimize the likelihood of a failure. Regardless, the simplest method to protect yourself? Make sure your deposits fall within the FDIC's insured limit for banks (currently $250,000), or the NCUSIF's (National Credit Union Share Insurance Fund) for credit unions. In the event of a bank failure, your savings should still be protected up to this amount.
If you have multiple accounts with the same institution and aren't confident that your deposits are completely insured, use the FDIC's insurance estimator to figure out how much of your money will be safeguarded in case of a bank collapse. If your funds aren't fully covered, consider shifting some of them to another institution before things take a turn for the worse.
- The signs of a bank's impending failure can be spotted early, such as the closure of branches (shedding locations) and staff redundancies (staff cuts).
- A sudden freeze on a home equity line of credit (locked HELOCs) may indicate that the bank is struggling financially.
- If your bank abruptly raises its loan rates significantly (skyrocketing rates), it might be a sign of desperation for income.
- If your bank allows existing business loans to expire without addressing it (expired loans), it could be a sign of an impending liquidity crisis.
- Sluggish payments, like delayed interest payments or processing times, could suggest that the bank is having trouble maintaining sufficient cash reserves, possibly indicating future failure.
