WASHINGTON- Bank experts say depositors’ money is safe at AllFirst Bank, but that shareholders will likely take a hit from the suspected $750 million fraud that the bank announced Wednesday.
“This situation won’t really affect account holders at all because the capital is going to be backed by the parent company,” said Erma Rabusa, spokeswoman for the American Bankers Association.
“It would affect the people who hold stock in it. Its numbers have plummeted for them,” she said.
Fritz Elmendorf, spokesman for the Consumer Bankers Association said Allied Irish Bank, the Ireland-based owner of Allfirst, is structured to insulate its subsidiaries and protect depositors from crises like this.
Banks set aside reserve funds, “like a rainy day account,” so they have a cushion to protect against losses, Elmendorf said.
But he noted that “A large portion of that capital consists of stock ownership in the bank.” When a bank loan occasionally goes bad, the loss comes out of the bank’s profit. A loss might mean the bank could lose money for a quarter or two, he said.
“But that comes out of the shareholders’ money, not the depositors’ money,” he said.
Allfirst Bank depositors will be covered by these reserve funds and will not be at risk to lose money, Elmendorf said.
In the unlikely event that Allfirst does not recover from the losses, Elmendorf said the bank could merge with another bank or could be sold.
In the worst case, the bank would become insolvent, meaning its liabilities exceed its assets, he said.
“This bank has not been decided insolvent, meaning depositors are not at risk,” he said.
Gretchen Wyatt, spokeswoman for the Maryland Bankers Association, said that if Allfirst did close, the Federal Deposit Insurance Corp. would cover account holders. The FDIC insures an individual’s deposits up to $100,000.
“The deposits are as secure as they always have been,” Wyatt said.
Depositors with more that $100,000 in a failed bank could lose some of their money, but Wyatt noted that Congress is currently debating a proposal to expand the limits of FDIC coverage.
Allfirst reported assets of $16.5 billion against liabilities of $14.9 billion at the end of the third quarter of 2001, according to FDIC filings. The bank, with 5,411 employees, had total deposits of $11.7 billion at the end of the third quarter.
“They are definitely taking a hit,” said Wyatt. But, “they are pretty well capitalized.”