Before a Bank Fails: 12 Warning Signs to Watch Out For

Your bank’s financial health matters…a lot. And that’s why you need to know what to look out for before a bank fails.

If you keep money at a troubled bank you should be worried. If that bank fails, you (and your deposit) are caught in a mess. And getting out of it is a nerve-racking and drawn out experience. 

Getting your money back (if you get any back at all) can be painfully expensive and inconvenient. And, you’re often left financially stranded, without any support, forced to sort it all out on your own.

But, there’s hope…

You can still protect yourself from bank failures and bail-ins. But you need to know what to watch out for and when to act.

Withdrawing your money before a bank fails is your last chance to protect your deposits before it’s too late. 

To do this, you need to recognize the early warning signs of a troubled bank. If you know which distress signals to look for, you can find out when something is wrong. Then, you can move your money to a safer bank before it’s too late.

Below are 12 warning signs to watch out for. You can use them to spot troubled banks and find out if your bank (and your money) is in danger.

Remember: These may be the only clues you’ll get before a bank goes bust. 

Failing Banks Are a Nightmare for Customers

before a bank fails nightmare

The actions you take before a bank fails are important. But, not surprisingly, most depositors either miss the warning signs or don’t know what to look for. And as a result, they don’t see trouble coming. 

Most people think that if a bank has deposit insurance, they don’t need to worry about bank failures. But that’s completely wrong. This is a false sense of security. 

The truth is, keeping money at an unhealthy bank is dangerous, expensive, and painfully inconvenient. And that’s true whether it’s covered by deposit insurance or not.

By recognizing the danger signs of a troubled bank you can protect yourself, spot shady banks, and move your money before you get entangled in a long and painful financial mess.

Here are some examples of the dangers and inconveniences you’ll experience when keeping money at a failed bank (or a bank that’s about to fail):

You Can’t Access Your Money

If your bank is under investigation, facing legal trouble, or liquidation, the bank will likely freeze all customer accounts and stop all services. Your money is frozen and can be locked up for months or even years.

Financially Stranded 

If your account is frozen, you can’t make transfers or use that money to pay for bills and life necessities. This is expensive and incredibly inconvenient. You’ll need to find another source of funds to pay your bills. If this account was your only source of funds, you’re left financially stranded. And, if you can’t make loan or credit card payments because all your funds are tied up, you’ll be forced to pay penalty fees and exorbitant interest payments.

Urgent Need to Open a New Account

This can be stressful. You’ll urgently need to find and open a new account at a new bank, if your bank fails (or is about to fail). Sometimes a troubled bank will simply close your account and mail you a check. If that happens, you’ll need to rush to open an account to access those funds as soon as possible.

You Lose Money & Take a Financial Hit

If your bank fails and doesn’t have deposit insurance, you could lose all your money. 

But even if your bank has deposit insurance, you can still lose your money. For example, if the country has bail-in legislation, depositors risk getting repaid in bank equity instead of cash.

Or, you could lose money if your bank fails and your money isn’t deposited in the “right” products. Only funds deposited in certain products and currencies will be reimbursed by deposit insurance.

Blacklisted & Can’t Open Other Accounts

If your bank does something fraudulent, illicit, gets in trouble for money laundering, or their reputation is tainted due to a public scandal, YOU can get hurt too. 

If your bank goes bust and closes your account, you’ll need to rush to open an account elsewhere and transfer your money to the new institution.

The trouble is, other banks might blacklist you by association with the last bank. Some will refuse to open accounts. If they do open accounts, they might refuse to accept transfers from the failed bank

Why? Too much stigma, scrutiny, and risk. Especially if your previous bank failed due to compliance failures and had a reputation for attracting unsavory clients. 

Warning Signs Before a Bank Fails

before a bank fails warning signs

What happens before a bank goes bust? Here are some early warning signs to watch out for. Use these to spot trouble ahead and protect yourself from bank frauds and failures.

A Sharp Decline in Customer Service 

Banks that are about to fail are usually in cost-cutting mode. As a result, customer service plummets and gets noticeably horrible. The bank might fire staff, cut employee compensation, cut entire divisions or reduce support to them. All of sudden, it takes 10 days to get an email response,  it’s impossible to get phone support, and technical support is non-existent. 

Poor Financials

Before a bank fails, it will often show signs of financial trouble in its financial reports. A bank’s financials determine the bank’s financial health and indicate larger problems. The GlobalBanks team analyzes each bank’s financial reports and keeps tabs on key financial ratios. With this in mind, you should pay close attention to liquidity and reserve ratios, as they reflect the health of the bank’s balance sheet.

Delayed Financial Reporting

If the bank delays the release of earnings or other financial details, it may be a sign they are struggling with their financials. Perhaps management is trying to manage an extreme or unexpected change in valuation, how to present poor financials to the market, or determine how best to deal with fall out. There are countless reasons. However, if there are extreme delays in financial reporting, take note and ask why.

A Sharp Drop in Total Deposits

If a bank has a sharp drop in total deposits from year to year, find out why. If depositors are leaving in droves, this can be a sign that other depositors aren’t happy and there’s a bigger problem.

Stops Offering Services & Halts New Product Offerings

Before a bank goes bust or experiences financial trouble, it might discontinue, limit, or restrict certain services. For example, no more outgoing transfers in certain currencies. Other times, it may stop offering new financial products or stop accepting applications for new loans and credit cards.

Abnormally Aggressive Marketing Tactics

Healthy banks are always proactively attracting new business and regularly advertising. But it’s when advertising ramps up to extreme levels, this could indicate a problem. For instance, this may suggest the bank is desperate to attract new deposits to shore up financial troubles. 

Account Opening Becomes Abnormally Easy

The bank starts accepting anyone as a client. Account opening becomes abnormally easy. The bank starts accepting any and everyone in an effort to beef up their balance sheet. The bank may eliminate certain KYC, AML, CDD (Customer Due Diligence) requirements to make it easier to open accounts. 

Bank Stops Accepting US Dollars

This is a classic sign of distress. What typically happens is the bank will announce to clients that they can no longer hold or transfer US dollars starting on a certain date. And if the client continues banking with the bank, they will need to do so in a non-USD currency. 

This suggests that the bank has either lost its US dollar correspondent banking relationship(s) or doesn’t want to attract scrutiny for future US dollar transactions. When this happens, you need to be thinking about whether there are better banking options available to you. And to be clear, there almost always are.

Bank Loses Correspondent Bank Relationships or Downgrades to Inferior Correspondent Bank

If a bank loses reputable correspondent bank relationships like JP Morgan Chase or Commerzbank and then starts using Western Union (or a non-banking institution or money transfer service), this is not a good sign and indicates a larger problem.

Similar to losing USD correspondents, you need to know whether your bank has decent correspondent banking relationships. This will tell you whether or not other banks trust and want to do business with your bank.

Legal Troubles & Bad Press

If the bank is experiencing legal troubles or has a string of arrests, investigations, unflattering press, or other conflicts, this can indicate a much larger problem. 

Layoffs & Branch Closures

Mass layoffs and branch closures can be a bad sign. And you should find out why. It may indicate that the bank is in cost-cutting mode and customer service will take a hit. If a bank did this suddenly and doing so wasn’t part of their long-term strategy, beware. It could be a sign of trouble. 

Large Fee Increases & Predatory Pricing

Distressed banks on the verge of failure are often in extreme cost-cutting mode and will increase fees to boost profits from existing customers. The bank is usually less interested in cultivating new business and instead tries to squeeze more out their customer base. That said, if you see an extreme spike in fees or notice drastically different fee structures being rolled out that seem unwarranted, it may be a sign of a larger problem.

How to Protect Yourself Before Trouble

before a bank fails protect yourself

The examples above are indicators of bank distress. When a bank has multiple distress signals over a period of time, it can indicate a larger problem. And for depositors, this can signal that it’s time to move your money and switch banks.

If you’re worried that your bank may be in financial trouble and need help figuring out what to do next, you can get started by using the information in this article.

But if you need more help or want to know the best ways to protect yourself, discover ultra-safe banking options, which countries to target, the best account opening strategies to use, and the best ways to overcome tough requirements, then we’d be happy to help you on your journey. 

When you join GlobalBanks, you’ll also get instant access to our entire archive of Banking Intelligence Reports including proven strategies for opening accounts, contact information for specific banks and bankers, details on bank preferences and sensitivities, customer case studies, and information on what not to do and which banks to avoid.

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