Now It's Starting to Get Personal, OR: Why you should be paying more attention to the Great Meltdown than the Presidential Election

OK I'll admit I'm dense, but it was not until today that I started thinking seriously about what it would mean if my bank failed.

I bank at PNC; it's convenient if often usurious in its fees. PNC fail? Can't find it on any warning lists (and the FDIC doesn't publish its watch list, which is now up to 117 banks), so just on a lark I went looking.

And there's my OH SHIT moment:

From Mortgage University:

PNC Bank owned by parent PNC Financial Services Group, Inc. (NYSE: PNC) is offering $100 new customer bonus to raise capital. Why does PNC Bank need a large influx of capital? This may spell trouble for the bank.

PNC Bank about six months ago ceased their home equity wholesale operation citing market conditions and high operating costs. It could also meaning PNC closed their home equity program because they finally realized their exposure to the higher default rates on home equity loans would cause significant losses down the road.

PNC Bank Raising Capital With Bonus Program

New personal checking account customers who make a direct deposit of $500 will get a $100 Bonus. The payout of the bonus will happen within 7 days of the first qualifying Direct Deposit as long as the Direct Deposit happens before the deadline of 9/30/08.

The key phrase there is “qualifying” Direct Deposit which they define as a Direct Deposit of a paycheck, pension, Social Security, or other regular monthly income made by an employer or outside agency.

A Brilliant Move - But For Whom?

Raising capital by enticing folks to regularly put money into PNC Bank is pure genius, but it smells fishy if you ask me.

The real question to ask is why does PNC Bank need to raise capital this way?

Is their balance sheet so out of whack they need a capital injection in a hurry?

Are all other methods of raising capital exhausted for PNC Bank?

Does PNC Bank see a wave of mortgage-related losses heading there way and need the money to stay afloat?

All good questions…of course, only time will give us the answers.

Great. Just great.

Is it mattress time? Probably not, but I decided to visit one of my favorite financial blogs, Wheaties for your Wallet, to find out what could happen just in case PNC turns out to stand for Probably Now Crashing.

The best case for bank failure (it that's not an oxymoron) is that you have less than $100,000 in any one account [that's me!] and are thus insured; and that a buyer is found for your bank very quickly. If that happens, the bank closed on Friday, reopens under new management on Monday, and your debit cards work all weekend.

If not--if finding that buyer takes a little more time--you can have the experience of this customer at NetBank:

For two to three weeks after NetBank closed, he had “no real access” to his money. At the time, he had all of his liquid funds in NetBank accounts, so in order to get by, he relied on his parents and his fianceé, and a couple hundred dollars he happened to have in his wallet when the bank failed.

He got one note from the FDIC saying that NetBank was failing, and after that, all of his communication was with ING Direct. (He had less than $100,000 in his accounts, so all of his funds were protected.)

The first message from ING Direct said (paraphrased), “In a few days, you’ll get read-only access to your account so you can confirm the funds are present.” As he put it, “Oh, great, a web page with some numbers on it. When can I actually get that money!?”

He had direct deposit set up to his NetBank account, and had one direct deposit payment “vanish into nowhere.” He had to get his employer to resend that payment to his new ING Direct account. (Note that the FDIC site says this won’t happen.)

Several automatic payments from his NetBank account were not processed, but since he was able to get the new ING Direct account set up within a few weeks, there was no real harm from this.

Overall, the experience was a big shock. “If I didn’t have very, very nice parents and a very, very understanding fianceé, I’m not sure what I would have done,” he says. He now has accounts at three separate banks in order to provide better access in the time of a crisis.

How to be prepared? Wheaties offers this advice:

1. Never keep more than $100,000 in any deposit account. If you have more than that much to save in deposits, distribute it over several different banks.

2. If you maintain an emergency financial fund (which is always a good practice), consider housing it at a separate institution from your primary account.

3. Always keep essential deposit accounts at FDIC-backed institutions.

4. Check your bank’s stability using Bankrate’s “Safe & Sound” ratings, or another rating system if you prefer.

5. As part of a standard home emergency kit, keep some cash in the house in a safe place — several hundred dollars, if you can. Storing your savings in your house doesn’t make sense, but having some cash to get you through in the event of any kind of trouble — bank trouble, natural disaster, or otherwise — is smart.

6. Be an informed consumer! Keep up with the financial news, and of course we believe Wesabe Groups are a huge help as well. Financial topics are overwhelming and can be hard to follow, but the more you learn, the better-off you’ll be.

Surprisingly, I can actually add one additional piece of advice: Like many modern bank customers we have been seduced into the ease of online bill-paying [which, by the way, PNC sets up so it generates a really nice secondary revenue stream]. That means, among other things, if PNC went belly up I'd be scrambling for account numbers and payment addresses, not to mention all the tax records these represent. So the suggestion: about once a quarter, update your paper file of account numbers and addresses, and at least once a month download the payment records into QuickBooks or whatever you use. At the very least, print off the payment records every few weeks.

Remember: nobody is coming to bail you out. You're probably going to have to do it yourself.