Good banks protect the assets of their depositors by making safe investments and not being over leveraged. Banks are fiduciaries so it is their responsibility to make sure depositors money is safe. Having said that, not all banks approach risk the safe way. In 2008 we learned that some banks were very heavily invested in sub-prime mortgages. Banks that had not been too aggressive survived and even flourished while other banks went bankrupt. Here are some things to consider when evaluating a bank:
History of the Bank:
How old is the bank? What kinds of clients do they have? How have they handled crises in confidence in the past? What is the culture of the bank?
People tend to have more confidence in banks that have a long history of responsible investment. It is important whether Wall Street has confidence in the bank. Banks should be concerned with making sound long term decisions not just meeting quarterly earnings. A bank that is well regarded by Wall Street is less likely to be a victim of short sighted thinking.
Counterparty Risk:
Who is the bank loaning money to? How safe are the loans? What is a bank’s reserve ratio?
One important thing to consider when evaluating a bank is where the bank lends depositors’ money. Does the bank make secured or unsecured loans? What is value of the collateral put up by the borrower?
Reserve ratios (what proportion of the bank’s overall assets are at risk because they are being loaned out) of banks are very important because they give an indication of the strength of bank if loans go bad. If a bank does not have the right reserve ratio then it is possible for one bad loan to take out an entire bank.
Total Assets:
Consider the total number of assets controlled by the bank. Banks with a large number of assets are more likely to survive a crisis because no single bad decision can destabilize the entire bank. Banks that are large have safety from government backing. Many banks are “too big to fail,” if something goes wrong the government of the bank’s country is likely to bail out the bank.
Country Risk:
Last but not least. This is especially important for E-commerce businesses that want to set up accounts in foreign countries. It is critical to choose a country that respects the property rights of account owners. The last place you want your money is in a country that would seriously like to steal your cash. This came very close to happening in Cyprus last spring!
Choose Your Bank Carefully!
A Bank can have an internationally known name. It may have beautiful offices in a magnificent building. However, looks can be deceiving. Only leave your deposits in a bank in which you have confidence. Do your homework…it is your money and it needs to be secure!
If you need a banking solution that is reliable and secure, see the bank acount services offered by Inc. Plan (USA).
