The financial crisis -- and its string of bank failures and bailouts -- has led many to question the safety of their banking institutions. If you're choosing a bank today, are you better off looking for a big bank, or a smaller one? Which is safer?
Perhaps there was a time, not too many years ago, when large banks were the very symbol of stability. Many of the biggest names had been around for generations, and their magnificent office buildings were physical evidence of their success and resources.
That changed with the financial crisis. The financial troubles and irresponsible practices of some of these household names badly tarnished the image of big banks.
As 2009 drew to a close, the Huffington Post suggested that you should withdraw money from the nation's largest banks and place your deposits instead with smaller, more community-based institutions. The campaign, Move Your Money, says that the large banks are the ones who have taken bailout money -- and that these same large banks do not appear to have learned anything from the financial crisis. So, the logic goes, depositors such as yourself can teach them a lesson about responsibility by moving funds to smaller banks.
Move Your Money has generated some resonance as a political protest. But if you're thinking of taking the pledge to move your money from a big bank to a small bank, you might be wondering: is that really the best thing for your CDs, savings accounts, and money market accounts?
Parsing the FDIC Data
MoneyRates.com decided to take a look at FDIC data on bank failures in 2009 to determine whether large banks or smaller banks would have been a riskier place to put your money. There does seem to be a significant difference in which has a greater incidence of failure.
The study separated failed banks into two groups--those that would be big enough to qualify for the largest 100, and the remainder of the field. (The cutoff point for the largest 100 banks is about $11 billion in assets, so when it comes to banks, big still really means big.)
Using these two categories, there were 5 failures of large banks in 2009 and 130 failures of smaller banks. But whereas the large bank category is defined as the top 100, there are nearly 7,900 banks in the smaller bank category. So on a percentage basis, while 5% of the top 100 failed, only 1.6% of smaller banks failed. Thus, in 2009 at least, large banks were indeed more likely to fail than smaller banks.
Likelihood of bank failure is a more complex question than simply looking at the percentages of failed banks in the past year -- and certainly many other factors go into a depositor's choice of bank -- but at least from this one standpoint, the data indicate that a depositor in a small bank last year would have been less likely to see their institution fold than a depositor in a large bank.
It could be argued that this question of security is academic for most depositors, as long as a bank is FDIC-insured. That's true, but nobody wants to go through the disruption of having their bank seized by the regulators. Plus, it's becoming painfully obvious that the FDIC insurance fund is not a bottomless well.
Factoring in Bank Rates
Of course, besides the security of your money, you also care about what interest rate you are going to earn. The answer to that question is changing almost daily, but you can find regular updates to those answers on sites like MoneyRates.com.
By looking at MoneyRates.com, you can rank banks by the interest rates they offer on different products, not by the size of their assets. There are many reasons for choosing a bank, but knowing what a bank has to offer you in cold hard cash is a good start.
Richard Barrington, CFA, is the personal finance expert for MoneyRates.com. He is a 20-year veteran of the financial industry and has written extensively on investment topics, including investments, money market accounts, certificates of deposit, and personal finance as it relates to retirement. Richard has been quoted by numerous media publications such as The New York Times, The Wall Street Journal, and Pensions & Investments magazine.