Commercial bank accounts mostly protected from credit crisis

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 raises the question of whether Wall Street's troubles could spread to commercial banks and ordinary depositors.

The short answer is this: 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," said Gerard Cassidy, a banking analyst at RBC Capital Markets. "There should be no panic whatsoever."

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

Accounts at Bear Stearns, an investment bank that does not cater to consumers, are not insured by the FDIC. But JPMorgan Chase & Co., which plans to buy Bear, has assured Bear's customers it will guarantee all the bank's business.

If Bear were to fail, customers of failed brokerages are protected by the federal Securities Investor Protection Corp., which can restore investor assets held by financially troubled firms.

An individual with more than $100,000 in a commercial bank can get coverage a couple of different ways, including by simply opening accounts at other banks.

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

Still not convinced? After all, banking analyst Meredith Whitney warned Monday that financial stocks could fall by as much as half, and consumer banks such as National City Corp. have seen their stocks slide, too, as the banking world shuddered.

Say the regulators are wrong and scores of banks begin to fail. How will 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 take a deep breath, because the FDIC's reserve ratio sank as low as a negative 0.25 percent in 1991, and depositors with accounts at failed banks were still 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 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.