You guys know I’m in the banking industry and I tend to keep up with things that are going on. Well, there’s some news making the rounds that’s got people a little concerned and I figured I’d share with you guys.

The FDIC is going to have to borrow money from the Fed if more banks go under, which we’re all pretty certain is going to happen.

The FDIC hasn’t had to borrow money from the Fed since the savings-and-loan bubble in the 90s, so the fact that they’re going to have to do so now is cause for concern. Not to be all doom and gloom, but people rely on that insurance to cover their deposits if a bank fails. The idea that the FDIC is running out of money – particularly when that fund was sitting at $45.2 billion – is a little alarming.

Here’s how that works. Banks are required to pay a percentage of their deposits into this fund. When they’re books are running low and they’re not meeting their deposit minimums, that’s usually when you’ll see an increase in their interest rates. It’s to help attract people in for their deposits. There are other reasons, but that’s a simple explanation. However, banks feed this fund the absolute bare minimum they can, so I’m not surprised to hear that after eight banks failing this year, the FDIC insurance fund is riding low.

There is talk that they’ll have to take out a line of credit with the Fed to cover their expenses until they can sell the assets off from the banks that failed. They’re also going to increase the minimum amount banks have to put into the fund, as well as, up the ante on what banks participating in risky lending practices are going to have to deposit to the fund.

That’s all well and good, but they should also be focusing on how to avoid this happening in the first place. Consumer trust in the banking industry is already dwindling, so now is the time to focus on rebuilding that trust, not scaring people into causing a run on the bank. For those of you who don’t know what a run on the bank is, that’s when everyone banking there runs to the bank and withdrawals all of their money. Think of the long lines at IndyMac Bank and you’ll have an idea of what I’m talking about.

This is exactly why I’ve said the NCUA fund is much stronger. Number one, credit unions tend to avoid the larger, riskier loans because the shareholders don’t want them. Since credit unions are owned by their members instead of stockholders, the products and services tend to be more consumer-friendly. That also means we typically don’t do business that could have a negative affect on our members.

But, the NCUA fund is stronger than the FDIC fund for several reasons. Credit unions haven’t had to pay out from that fund in almost 40 years. FDIC has paid out and drained their fund twice in the last 20 years. When a credit union goes under, we all come together and try to adopt them into our charters, that way the credit union doesn’t technically fail, it’s acquired. That’s a huge difference between banks and credit unions; it’s not all about the competition. Yes, we do compete with each other for business, but we don’t sacrifice the community and our members to do it. Another reason the NCUA fund is stronger is because we deposit more than the minimum required of us.

So, where does that leave you now? Don’t panic. For the time being, borrowing money from the Fed is a viable option. It’s only short-term, so the debt they incur should more banks fail will be paid off very quickly and they will have enough time to implement their new policies with regard to the banks’ depositing to the fund. But, if you’ve got more than the FDIC-insured coverage sitting in one account, I would highly recommend you diversify that.

Look for smaller community banks and credit unions that are FDIC and NCUA insured. They tend to be stronger financial institutions. Also, check your bank or credit union’s rating – either at bankrate.com or Bloomberg.com. These websites can give you a gauge on how your financial institution is doing compared to everyone else. If they have a low rating, consider moving your money to a more secure location. But, even if your bank fails, the FDIC will still honor their insurance commitment, it may just take a little longer to get the funds to you.

Have you already moved funds from a bigger bank to a smaller one? What made you decide to do that, and are you concerned with the number of banks failing?

Related posts:

1. FDIC and NCUA Revisited
2. Banks vs. Credit Unions: Which is Better?
3. Deposit Insurance: Recession-proof your savings
4. The Difference In Money Market Accounts
5. Bank Collapse Survival Guide