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ARE BANK INVESTMENTS THE BEST FOR YOU?

Published by sam - 30/08/07 - 12:08:48 am

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There are several reasons why banks are the first alternative that people choose for the deposit of their savings.  To begin with, banks provide many people with their earliest experience with any form of savings account.  In addition, on the basis of a personal relationship with a pleasant teller or a friendly manager, some people develop a loyalty to their bank that discourages a cold, objective comparison of interest rates and investment options.  Moreover, because they are reluctant to deal with strangers and mistrustful of the U.S. mail, many people prefer a relationship with a local bank they can visit at any time.  And, finally, banks tend to emphasize the safety that FDIC or FSLIC insurance offers their depositors.

All of these factors predispose many depositors toward banks and cause them to overlook some attractive alternatives instead of considering them carefully and objectively.  Before assuming that bank offers you the best all possible vehicles for your savings, you ought to consider the alternatives discussed in chapter 5 and in chapter 17 through 22.

CLOSE-UP:
LEGAL PROTECTION FOR DEPOSITORS

Deposit Insurance

Federal insurance coverage for bank deposits-through the federal Deposit Insurance Corporation for commercial banks and many savings bank and the Federal Savings & Loan Insurance Corporation for savings bank and savings-and-loan association—protects depositors to a maximum of $100,000 at any one bank.  All federally chartered banks are required to be members of the FDIC; state chartered banks need not belong, but most do.  In some states savings and loan associations, instead of seeking the protection offered by FSLIC membership, carry state-sponsored or private deposit insurance.  Because the latter encountered financial crisis in several states, depositors are wise to deal only with banks that are members.

The $100,000 insurance ceiling applies to all money depositors in any one bank under the name (or Social Security number) of the same individual.  Thus, a depositor with $30,000 in a money market account, $75,000 in one or more certificates of deposit, and $3,000 in a checking account would have coverage on only $100,000 of the $108,000 total.

A depositor can, however, extend this $100,000 coverage in several ways: by opening one or more accounts in a different bank (not just another branch of the same bank); or by opening a second set of accounts in the same bank in joint ownership with a spouse or a child, or in the name of a revocable trust. Each of these accounts, because they have different registrations, will enjoy the full $100,000 protection.  (However, anyone person’s coverage for his  or her total deposits in all joint accounts in the same bank is limited to $100,000.)

Although the federal insurance programs guarantee the safety of deposits, they do not guarantee that depositors will be able to withdraw their money on demand.  The terms and conditions governing a regular savings account specify that the bank may require the depositor to provide advance notice—typically, 30 days—of the intention to make a withdrawal.  In actuality, though, this requirement, which is designed to protect the bank in situations of unusual cash outflow or other crisis, has been invoked very rarely, and only for periods of a few days.  By contrast, some state insurance programs have been depleted in recent years by the failure of a number of savings and loan institutions, and depositors have been experienced uncertainties and extensive delays in retrieving their deposits.

In general, depositors can rely on the protection offered by FDIC and FSLIC.

Investment Regulation
Consumers who use bank loans have been protected for several decades by the federal Truth is Lending Act, but no such federal protection extends to those who use banks as repositories for their savings, although proposals are before Congress.  At this writing, nine states—New York, Massachusetts, Ohio, Illinois, Lowa, Maryland, Rhode Island, Texas, and Wisconsin—have enacted Truth  in savings legislation.

Consumers who bank outside those states can use the provisions of the New York law as a checklist for evaluating an individual bank.  The New York law requires banks to disclose the basic annual interest rate, the periodic percentage paid at each compounding period and the annual percentage yield—what your account would earn, with compounding, if it remained on deposit for one year.  These basic figures should permit you to compare any bank with any other on equal terms.

In addition, potential depositors should check on other features are not subject to regulation and are at the discretion of the individual bank: service charges on the account at various balance, levels, minimum balances which interest is not paid, the compounding and crediting of interest, the charges levied for the excessive use of checks drawn against money market accounts, the basis used to determine rate changes on variable rate certificates of deposit, and the penalties for early withdrawal of time deposits.

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