A key factor in choosing banks is FDIC insurance. The safest banks are FDIC insured, meaning the US government will guarantee a minimum level of protection on your deposits. For credit unions, the equivalent is the NCUSIF.
Bankrate Safe and Sound Ratings
Bankrate.com has a rating system called the Safe and Sound rating to identify the safest banks. This is a star based system, where the safest banks hold a 5 star rating. Most banks have a 3 or 4 star rating. You can find out more at Bankrate.com.
The Texas Ratio is a way of measuring how risky a bank is. It looks at how likely bad loans are to drag the bank down. The safest banks have a Texas Ratio well below 100% (or 1:1). They are better able to absorb losses on defaulted loans.
BauerFinancial is another service with an easy to use star system. The safest banks are 5 star rated. BauerFinancial includes ratings on credit unions, and you can search by typing in the name of your financial institution. Find out more at BauerFinancial.com.
Too Big to Fail
Some people believe in the concept of ‘too big to fail’. In other words, they believe that the safest banks are the largest banks with tentacles reaching into many parts of the economy. The idea is that governments will prop up these banks and prevent them from failing.
In an effort to compete with the ‘too big to fail’ banks, smaller banks have gotten creative. For example, the CDARS program allows CD investors to make large deposits (above FDIC limits) at a smaller institution and still get full FDIC coverage.
Keep Your Ears Open
You can also get a feel for bank strength by watching the news. The safest banks may win praise at a time when weaker banks are in trouble. If your bank keeps showing up in the headlines as a soon-to-fail bank, you'll know about it ahead of time. Of course, there may be false rumors and panics, so you'll have to evaluate your sources.