How Weiss Ratings’ Accurate, Advance Bank Failure Warnings Can Help You

Last week, I talked about how the banking industry is in recovery mode. Specifically, data from both Weiss Ratings and the Federal Deposit Insurance Corporation (FDIC) have shown a significant decrease in the number of weak or problematic banks since the 2008 financial collapse.

Today, I would like to go a step further and analyze actual bank failure trends. That should provide some additional insight on the topic. I will also show you what Weiss Ratings said about banks in the past when they failed, and outline what generally happens when a bank collapses.

First, let’s take a look at the overall bank failure trend from 2006 to 2017. The data show 526 bank failures since 2007. But as you can see from the graph below, annual performance was radically different during that 11-year stretch.

In 2006, we did not see a single bank failure. But it was definitely the calm before the storm in the financial world. Failures skyrocketed to 140 banks in 2009 and 157 in 2010, marking the two highest failure periods of the last 11 years. Since then, they have been on the downward slope, dropping to only five in 2016 and three in 2017 so far.

Here at Weiss Ratings, we monitored and rated every single bank that failed over the last decade. Most of them — 91.3% to be exact — were rated “E”, or very weak, at the time of failure. That highlights the precision and accuracy of the Weiss bank ratings model when it comes to identifying potentially troubled institutions.

There were also 39 “D” and 6 “C” rated banks at the time of failure. The one anomaly in our recent record came in 2010, when an “A-” rated bank failed following inappropriate underwriting and accounting practices, according to the audit performed by the Treasury Department.

Indeed, the graph below shows just how reliable Weiss safety ratings are when it comes to identifying a possible failure.

Lastly, I would like to talk about what generally happens when a bank goes out of business. The FDIC steps in immediately and assumes two major roles:

First, it acts as the insurer of the bank’s deposits, guaranteeing that a depositor will get back up to $250,000 of his or her deposits. According to the FDIC, no depositor lost a penny of insured money since the agency was created in 1933.

Second, it becomes the “Receiver” of the failed bank. Its responsibility is to sell the bank’s assets and settle its debts. Generally, the transition of the failed bank assets and debts to the new owner is smooth, with minimal interruptions to the customer. But if there’s no buyer interested in the failed bank, the FDIC runs the institution until it finds one.

So if your bank ever fails, the FDIC and the acquiring institution will notify you. But don’t expect to hear anything troublesome about your bank beforehand, as this information is kept confidential until the official failure announcement to prevent banks from being overrun by depositors attempting to withdraw their money.

This is where Weiss can help, because our ultimate responsibility is to you the consumer. We name the names of banks at elevated risk of failure so you can make informed choices with your money, and as I demonstrated earlier, our track record in identifying troubled institutions is stellar.

So be sure to stay in the loop with what’s going on with your bank. All you have to do to check your bank’s safety rating is go to the Weiss Ratings website and add it to your Watchlist. Then we can let you know if there are any rating changes.

Think safety,

Remi Lukosiunas

Money and Banking Edition, By Remi Lukosiunas, Financial Analyst Remi Lukosiunas, a Financial Analyst, joined Weiss Ratings in 2014 with a financial services background in internal audit and the credit union industry. Remi conducts banking, credit union, insurance and investment research. He has also written extensively on stocks and investing using ratings as a guide. Remi is a graduate of Florida State University with a degree in multinational business.