The recent subprime mortgage crisis has caused investors and consumers alike to be more conscious about the financial health of the institutions where they invest their money. It is important these days to do your homework before investing money anywhere and look for warning signs that a bank might be in trouble.
Unrealistic CD and Savings Return Rates
Typically, the financial institutions that offer extremely high-interest returns on their CDs and savings accounts are desperate to attract new customers. Generally, banks receive their capital through brokered deposits. However, banks that are having financial trouble and are deemed to be under-capitalized by the federal government become restricted from accepting brokered deposits. In this case, the troubled banks use their own over-zealous techniques to attract more depositors by offering unrealistically high rates.
Lending in Troubled Areas
Markets such as California and Florida used to be the best real estate markets to invest in only a few years ago because of their potential for high returns. However, after the market went bust, these areas were the first to see tremendous declines in property values and drastic increases in foreclosure rates. Many banks that lended predominately in these areas have gone under.
Bank Layoffs and Cutbacks
An announcement in the media that your bank is laying off a large number of employees could be a sign that your bank is in trouble. Such a drastic business decision could be a precursor to an announcement of financial difficulties by your bank.
Enticements to Do More Business
If you are an existing customer, and all of a sudden you are being showered with solicitations by your bank to do even more business with it, it could be a danger sign that your bank is having financial difficulties. Banks in this position often employ aggressive techniques to entice their existing customers to invest more money in hopes of recouping some of their losses.
Failing in the Stock Market
If stock market reports are showing your bank as one that is on the downturn, then chances are the investors have done their homework and found your bank's financial statements to be unsatisfactory. A consistently weak financial statement could mean that your bank is in danger of failing.
More Problem Loans Than Capital
It is important to determine how much of your bank's assets are actual capital and how much of the assets are based upon potentially bad loans. The subprime crisis has taught us that several bad loans can lead to bank failure. Therefore, the bank's asset portfolio should be studied carefully. Having capital based upon several bad loans is a sign that your bank might fail.
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