The vicious circle: Bank stock investors vote with their feet, fearing that many depositors might do the same

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The sight of depositors lined up outside IndyMac Bank branches today to pull their money can’t be giving comfort to bank regulators.

It gave none to bank stock investors: Wall Street hammered bank shares across the board. The BKX index of 24 major and regional bank issues plunged 8.5%, deepening its year-to-date loss to 43%.

Check out the day’s percentage declines in National City Corp., Washington Mutual, Zions Bancorp and Downey Financial, to name just four.

Investors who are dumping bank stocks, even at these severely depressed levels, are voting with their feet. The question is, how many bank depositors around the nation today are doing the same?

There’s the potential for a vicious circle here: Investors fear bank failures, so they pound the stocks. Depositors, seeing Wall Street’s reaction, begin to pull their funds, worrying (probably needlessly) that their money is in another IndyMac. A deposit run then can turn a reasonably healthy bank into a problem bank in a hurry.

Sheila Bair, head of the Federal Deposit Insurance Corp., is trying her best to induce calm, saying over the weekend that ‘the overwhelming majority of banks in this country are safe and sound.’

But we’re in an environment where there has been no payoff for taking chances in the financial system.

By the FDIC’s count, about 10,000 IndyMac customers held a total of $1 billion in uninsured deposits in the bank. If those customers believed that the deposit insurance limit didn’t matter -- and that the government would back all of their savings if IndyMac failed -- they have just now come to realize how wrong they were.

Too late.

If you’re over the FDIC’s insurance limit at IndyMac, the agency will let you pull out half of whatever you have on deposit above the limit. Then you’ll wait to find out what the FDIC can get as it sells off IndyMac’s assets.

The FDIC can’t predict what portion of the remaining uninsured deposits, if any, will be repaid.

That is a horrible situation for those depositors. They should have known better, but they either ignored the insurance limits or put off doing something about their funds.

So we can imagine what’s going on around the nation today. How many bank customers, now realizing that it is possible to lose money if your deposits exceed the federal insurance limits, are trying to make sure that they don’t repeat IndyMac customers’ grave mistake?

The banks aren’t going to tell us if they’re facing a wave of customers either withdrawing money to get below the FDIC’s limits or restructuring their accounts to stay within those limits. It isn’t in any bank’s interest to be that upfront.

The FDIC may be right when it says the risk of your bank failing is extremely low. But the fate of uninsured depositors at IndyMac is a bell-ringer. It says you can lose.

For many Americans, that now may be all they need to know.