Don’t Let Your Bank Fail 👎 You: How to Evaluate 🔎 Your Financial Institution
If you’re a small or medium-sized business owner, you probably have a lot on your plate. You’re managing employees, balancing budgets, and keeping up with industry trends.
But there’s one thing you may not be paying enough attention to: your bank.
With recent news of Silicon Valley Bank’s troubles, it’s more important than ever to know your bank and make sure it’s the right fit for you.
Five things to consider when evaluating your bank
Investment Strategy
Where is your bank putting their money?
Are they taking on too much risk?
And, more importantly, are they taking on too much risk with your money? You don’t want to be caught off guard if your bank fails because they invested in something that was too risky.
One factor to keep in mind is duration risk, which refers to the potential for a loss due to changes in interest rates. It’s important to make sure your bank’s investment strategy fits your risk profile.
Duration risk is an important factor to consider when evaluating a bank’s investment strategy. Duration risk refers to the potential for a loss due to changes in interest rates.
If interest rates rise, the value of the bank’s investments may decrease, leading to a loss. On the other hand, if interest rates fall, the value of the bank’s investments may increase. It’s important to make sure your bank’s investment strategy fits your risk profile and that they are managing duration risk effectively.
Banks make money by investing the money deposited by their customers. This can include investing in stocks, bonds, and other financial instruments.
While these investments can generate significant returns, they can also be risky. Banks must balance the potential for high returns with the risk of losing money.
When evaluating a bank’s investment strategy, consider the level of risk they are taking on and whether it aligns with your risk tolerance.
Loan-to-Deposit Ratio
The loan-to-deposit ratio is a measure of a bank’s ability to meet customer demands for withdrawals.
When evaluating a bank, consider their loan-to-deposit ratio and make sure it is within an acceptable range.
👀 Additional Resource:
US Bank Loan-to-deposit ratio rises as loan growth, drop in deposits continue
A high loan-to-deposit ratio could mean that your bank is lending out too much money and could be at risk of running out of funds.
In other words, if all of their borrowers decide to withdraw their money at the same time, the bank may not have enough cash on hand to meet those demands.
This can lead to serious problems, including bank failures. It’s important to make sure your bank is managing its loan-to-deposit ratio effectively.
Signs of Excess Cash
Holding too much cash can be a red flag when evaluating a bank because it can indicate that the bank is having trouble finding places to invest its money.
However, there is another important reason to consider: inflation.
Inflation is the rate at which the general level of prices for goods and services is rising, which means that the value of money is decreasing over time. If a bank is holding too much cash, that cash could lose value due to inflation over time.
In other words, the buying power of that cash could decrease, meaning that you would be able to buy less with that money in the future. It’s important to consider the impact of inflation when evaluating a bank’s excess cash holdings, and to make sure that the bank’s investment strategy aligns with your risk profile and investment goals.
History
It’s always a good idea to check a bank’s history before doing business with them.
Have they needed government bailouts in the past?
Have they been involved in any scandals?
These are important questions to ask. While past performance doesn’t necessarily predict future results, it’s still a good idea to do your due diligence and make sure you’re comfortable with the bank’s track record.
👀 Additional Resource:
Bank Bailout Tracker
FDIC Insurance
Finally, it’s important to understand how much of your money is insured by the FDIC and what happens if your bank fails.
🔮 Crystal Ball Though:
With every additional bank failure, it is looking like the U.S. Government will insure all deposits. At least that is what they want to to believe in order to prevent future bank runs.
👀 FDIC insurance for all deposits looks like a possibility
The FDIC “officially” insures up to $250,000 per depositor, per insured bank, for each account ownership category. If your bank fails, the FDIC will step in and return your insured deposits to you.
It’s important to do your due diligence when evaluating your bank. You want to make sure your money is safe and that your bank is the right fit for your risk profile.
By considering these five factors, you can make an informed decision about where to put your hard-earned cash.
Remember, you work hard for your money – make sure your bank is working just as hard to keep it safe.
