The fact is most banks are still doing fine. Even the mega banks, which isn’t something I’m particularly happy with, but nevertheless they seem to be recovering nicely. However, there are still about 300 to 600 that are facing some serious problems. Those range from small community banks to large regional banks. The FDIC has already closed 38 banks this year, they closed seven last week. They expect to close more this year than last year.

That is a lot of potential failures. What can you do to protect yourself? First, as long as your deposits aren’t greater than $250,000 (some accounts such as IRAs, Joint Accounts, and some others are insured separately), if a bank closes you will get your funds back. Generally, deposits are returned within 7 to 10 days. But, if you have longer-term CDs paying good rates, there is interest rate risk. The 5-year at 5.50% that you opened 3-years ago could be closed and your available rates to re-invest at this time are much lower.

Even though the FDIC is facing huge losses, you don’t need to worry about not getting your insured funds back. They assessed the banks with a 3-year insurance premium to give them some cushion as they go through 2010, they began to asses brokered deposits, and will do what they need to make sure you are covered. They can even get a loan from the Treasury if needed.

It seems that once a bank goes into an under capitalized state it is hard to recover. In order to recover they need to minimize further loan losses which seems quite difficult in this environment and increase capital from stock holders. However stock holders are probably looking to not putting any more funds on the chopping block.

Residential loan losses are increasing and many banks are also beginning to see weaknesses in the commercial sector. For many commercial loans were their bread and butter. With loan rates above 7%, they made for a great return. But any rate of return is only as good as the payback. Paybacks are not coming like they use to.

You should keep an extra eye-out on banks in problem areas such as California, Florida, Georgia, and Nevada as well as in states with high unemployment.

There are a couple of sites that have free bank rating tools. Bankrate.com and Bauer are two of them. Both use a star rating system and take numerous criteria into account to determine how high to rate a bank. Ratings go from NR (not rated) or UR (unrated) to 5-stars (highest rating). It is rare to see NR ratings, but before the Bank of America take over, Countrywide had that dubious honor. NR and 1-Star banks should potentially be avoided especially for CDs. The sad fact is your bank may not be around the whole term and you may be faced with investing in a lower-rate environment. Of course, if the FOMC starts increasing rates, you could end up with a free closure and invest in higher rates. I just think lower rates are likely in the next year.

2-star rated banks have some definite short-comings whether it is large losses, low profits, or being under capitalized. 2-Star banks have a chance at recovering and at least will be around longer than the others. Although, we have also seen 3 and 4-star banks suddenly be 1-star, so you just can never tell.

3-star rated banks are considered average. They don’t have exceedingly great stats, but aren’t on the brink either. They will most likely weather current financial storms.

4-star and 5-star are the “cream of the crop.” Although as a I mentioned some 4-stars have turned sour quickly; I haven’t seen a 5-star go down in flames. So if you want to avoid a bank failure with as much confidence as you can, start with these. If you want some little higher yields, look at the 3-star. If you just don’t care, then just search for the highest yields you can.

Do keep in mind that ratings are always 3 to 6-months behind. Current ratings are based on the FDIC data that was posted as of December 2009. It is almost April 2010. In these days, stuff can happen quickly. Continue to monitor your banks performance. If your institution’s performance continues to degrade and the penalty isn’t too large, you may want to close out your CD. Of course, you would want to compare that loss to what would happen if you let it stay and it is closed later on. I should write an Early Withdrawal Penalty calculator and post it. Send me some energy drinks (I like Sobe Lean Energy) and I can get that done. Or if you know of one, leave a link in the comments and I’ll link to it.

Chris Duncan is a FINRA Registered Representative. He specializes in helping clients find the best and highest CD rates nationwide. His clients include individuals, financial institutions, corporations, and public agencies. Visit us at to Compare CD rates