Surge in bank profits, stability reducing risks for consumers

Americans have a lot to worry about with their money. But the safety of bank accounts, for the most part, is not one of them — and that’s more apparent now than it has been in a while.

No banks have failed this year, while the number of problem institutions has declined to a trickle and profitability has surged.

The industry earned a combined $60 billion in profits in the second quarter, according to the Federal Deposit Insurance Corp., with 96 percent of all banks generating a profit.

If the trend continues, 2018 would mark the first failure-free year since 2006. It’s also down from the recent cyclical peak of 157 failures in 2010.

That’s a big positive for the economy. The robust and improving strength of the banking industry means the lending spigot remains “on.” Along with extending loans, banks also are willing and able to invest in new technologies that consumers demand in defense against cybercrooks and old-fashioned criminals. They have cut fees for some services, such as checking accounts, for many customers.

Industry strength also has boosted the insurance fund that backs deposit accounts, although it’s important for consumers to recognize that many of the financial services they purchase through banks don’t come with any such protection. In what could be the latter stages of an economic expansion and stock market rally, when investors get greedy and careless, that’s a warning worth repeating.

For example, checking accounts, savings accounts, certificates of deposit and money market deposit accounts all carry insurance. Stocks, bonds, mutual funds, annuities and life-insurance policies don’t.

Nor do money market mutual funds, though these instruments are highly secure. Contents in safe-deposit boxes are also not covered by insurance.

Deposit insurance itself can be a bit confusing. If you haven’t visited the topic in a while or hold a lot of money at banks, it’s worth brushing up on the key message: All depositors receive basic insurance protection of up to $250,000 in deposits held at each bank (though not each branch).

So, if you have more money than that and want to keep it with banks, you could extend your insurance by walking to another banking company across the street and depositing money there. You could also go to one or more credit unions, which similarly cover up to $250,000 through a separate federal agency.

It’s also possible to get more than $250,000 in deposit coverage at the same bank, depending on how your accounts are titled. Coverage expands for joint accounts, Individual Retirement Accounts, certain types of trusts and other arrangements.

The Federal Deposit Insurance Corporation has a calculator at FDIC.gov that allows you to determine your coverage levels, by plugging in account information and deposit balances. It’s called the EDIE or electronic deposit insurance estimator.

The FDIC’s insurance fund has gradually risen to $98 billion with enough money to cover 1.33 percent of industry deposits — the highest level in 15 years. Even beyond FDIC insurance, deposits are backed by the full faith and credit of the government, and the FDIC says no insured deposits have ever lost money through a failure.

The vast majority of banks, though not all, are covered by deposit insurance, and these institutions are required to post stickers to that effect on branch windows. Also, you can look up a bank’s FDIC coverage, or the lack thereof, using the BankFind icon at fdic.gov.

A key trend in recent decades has been one of consolidation. From more than 15,000 U.S. banks in 1990 and more than 10,000 in 1999, the latest count has dropped to roughly 5,500, according to the FDIC. The 10 largest institutions, led by JPMorgan Chase, Bank of America and Wells Fargo, hold about half the $12 trillion or so of the deposits out there.

When it comes to banking, there is something to be said for size. Despite the advent of mobile and online banking, many customers still like to visit branches and go to ATMs — and the big players have the largest networks. They also tend to offer the most products and services.

The number of branches has been declining, but not as quickly as the number of banks. Offices have dipped to around 89,500 from a peak above 100,200 in 2009.

Even in the digital age, branches are far from dead. For example, Jamie Dimon, JPMorgan’s CEO, vowed to expand the company’s consumer branch business into 15 to 20 urban markets, including a current push into Boston, Philadelphia and Washington, D.C. That means increased access for consumers to mortgages, investments, credit cards, private banking for upscale clients, financial planning and more.

Some new locations focus on helping customers with digital-banking needsand don’t have traditional teller windows.

“Exciting” new products and services that he referenced in the company’s 2018 annual report range from an Amazon Prime Rewards Visa card to customers being able to log into certain accounts using facial recognition.

Given the consolidation trend, the biggest banks are becoming even more important for the overall economy. That’s why the Federal Reserve tries to predict how a major global recession would affect these companies. Each of the 35 biggest U.S. banks passed the latest “stress test” conducted earlier this year. Stress tests are held on an annual basis.

Combined, the 35 biggest banks would have enough of a financial cushion to continue consumer and business lending, according to the Fed, despite possibly suffering losses of around $578 billion over a hypothetical nine-quarter period.

The banks’ capital conditions were tested under a scenario that envisioned a deep global recession that saw short-term interest rates spike and the U.S. unemployment rate more than double to 10 percent.

The stress-test results, and many other indicators, favor the banking system right now, and hopefully these trends will continue.

The last recession, centered as it was on the banking system, showed how bad matters can get when they don’t.