March 24, 2008: 4:43 AM EDT
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US regulator: Your bank deposits are safe

Sheila Bair, the nation's top banking regulator, tells Fortune that a tiny number of banks may fail during this crisis, but ordinary bank customers have nothing to fear.

Katie Benner, writer-reporter

Sheila Bair, FDIC Chairman, believes the worst of the credit crisis will work its way through the system by year's end.

(Fortune) -- Sheila Bair became Chairman of the Federal Deposit Insurance Corporation in June 2006 - just in time for the end of a real estate and credit bubble that has made her job one of the toughest in the regulatory world. She was one of the first members of the Bush Administration to say that it was the job of lenders and big banks to help mortgage holders in distress; and she has fought to uphold strict banking standards and create more lending laws.

A former University of Massachusetts professor (her specialty: financial regulatory policy), Bair has worked at the Treasury Department, the New York Stock Exchange, and the Commodity Futures Trading Commission.

She tells Fortune's Katie Benner why ordinary bank customers shouldn't panic, how long she thinks the credit crisis will last and what the silver lining might be.

Q: What if banks fail in the credit crisis? Will customer money be safe?

A: Banks are a safe place to put money, even if there are failures, because deposits are insured up to $100,000 and self-directed retirement accounts (IRAs) are insured up to $250,000. If you go to the FDIC website, there is a deposit insurance calculator on the site that people can use to make sure that their money is fully insured. The FDIC has a perfect track record on that score. I don't make predictions, but based on the information we have more than 99% of all banks are well capitalized.

Q: How many small banks are in danger of failing?

A: There are 76 banks on the troubled-bank list, and most of those will be nursed back to health or be acquired by stronger institutions rather than fail. Plus, those 76 banks represent $22 billion in assets out of $13 trillion overall. That number could go up, but we would still be well within historical norms and far below the number we've seen in other troubled times. To put things in perspective, there were 1,500 banks on the troubled bank list in 1990.

Q: If you have an account at an institution that is absorbed or folds, will you have problems accessing your money?

A: If your bank is acquired, there should be no impact. The name of your bank will change, but most banks are good about ensuring a smooth transition when they acquire another institution. They have to give advance notice about any changes in fee structure. In the case of a failure, we always arrange for another institution to acquire the insured deposits. We will close the bank on a Friday and by Monday the deposits will have been transferred. This helps ensure nearly uninterrupted access to funds.

Q: What are the most important questions to ask if you open a savings or checking account or CD?

A: Assuming your deposit is less than $100,000 and you're fully insured, you want to ask about the interest rate you'll get on your account. You want to know about absolutely all fees, including transaction fees and minimum balance penalties. You also need to be very careful about overdraft protection. Some customers routinely use it as a source of credit when they are short on money, and this is an expensive option. If you pay a $35 overdraft charge because you just went over your limit by $20, you've paid a very high interest rate on your loan.

Q: How long will the credit crisis last?

A: This very challenging credit environment will likely continue through most of 2008, but will clear out towards the end of the year.

Q: Are you worried that the steep rate cuts will, once again, encourage irresponsible lending practices?

A: I don't know that even low rates will encourage lax lending again, at least not for banks. They're not perfect but they are heavily regulated. We had a sense that the cuts were coming and we issued several pieces of guidance to banks on appropriate ways to tighten up credit and improve risk management.

We have really encouraged banks to take a balanced approach when it comes to extending credit. We want responsible underwriting, but we also want there to be ample credit to support an economic revival. I hope we're hitting the right balance.

I do believe that it's important for the Fed to finalize mortgage-lending rules across the board - not just for banks but for non-bank mortgage lenders. At some point the cycle might pick up again and we need to make sure we have strong rules that ensure that all lenders are responsible when they extend credit.

Q: What will the banking system look like after the credit crunch has passed?

A: People now understand that we need to get back to basics like strong underwriting standards, loans that people can pay over a long term, and a long-term commitment on the part of lenders to customers and communities. The silver lining is that people now understand that lending had gotten too lax and there were not strong enough rules or consumer protections in place. To top of page

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