What happens if my bank fails? How can I protect my money? Should I switch banks?
I’ve been fielding questions like these since the recent failures of technology-focused Silicon Valley Bank (SVB) and Signature Bank. Google has too. The search engine’s data reveal that the week the two banks buckled, there was a 43% increase in people asking, “Is my money safe?”
Given that SVB and Signature Bank are the second and third largest bank failures in U.S. history, such fear is understandable after hundreds of banks folded in the Great Recession,
However, “this is not 2008,” David Sacco, an instructor in finance and economics at the University of New Haven's Pompea College of Business, told USA Today. “Most banks are in better shape than they've been in in a long time." So the question then becomes, what about your bank?
Step 1: Check that your bank is FDIC-insured
You should only keep your money in banks that are members of the Federal Deposit Insurance Corporation (FDIC). The overwhelming majority of banks are FDIC members, but you need to be sure.
You can check if your bank is an FDIC member by:
- Looking at your bank’s website or literature (e.g., pamphlets) to see the words “Member FDIC”
- Using FDIC’s online “BankFind” tool. Just enter your bank’s name and the site will tell you if it is insured
- Going the old-fashioned route, walking into your bank, and checking for “Member FDIC” signs at tellers’ stations
But why is it so important for your bank to be FDIC insured? Because if your bank fails (meaning it can’t return deposits) due to financial insolvency, natural disaster, a robbery, and a host of other reasons, you will not lose your money.
And rest assured, the FDIC has a 90-year track record of delivering on this front. As its website states: “No depositor has ever lost a penny of insured deposits since the FDIC was created in 1933.” Not a penny. And if your FDIC-insured bank fails, the FDIC will return your insured deposits within days or provide that amount in a new account at another bank. Banks have often been wound down on a Friday and customers have gained access to their accounts the following Monday.
However, this FDIC insurance only applies to your deposit accounts, such as checking and savings accounts, CDs (certificates of deposits), money market deposit accounts and others. It does not cover investments, such as mutual funds, stocks, bonds, crypto assets, and more. You can see the complete list of what the FDIC covers and does not cover here.
For your deposit accounts - if they are held at an FDIC member bank - you do not need to do anything (e.g., apply for insurance) to protect your money. You are automatically covered.
If you use a credit union, you will need to check if it’s a member of the National Credit Union Administration (NCUA). Like the FDIC, the NCUA also has the full faith and credit of the U.S. government behind it.
Step 2: Keep your deposits under $250,000
Whether you’re with a small regional bank or a large national bank, as long as it’s insured through FDIC or NCUA, then the next step is to focus on your balance at that bank.
Your deposits at one bank need to be under $250,000 to be insured. Specifically, this limit is per depositor for each account ownership category, such as single accounts, joint accounts, business accounts and others.
This means that if you have your own individual checking and savings accounts at an FDIC-insured bank, then this is considered one category, and added together, both accounts should not exceed $250,000.
On the other hand, individual and joint accounts at the same bank are insured separately under FDIC rules. Therefore, you could safely have up to $250,000 in your individual account and up to $250,000 of your funds in a joint account with someone else.
Because it can get complicated to figure out if your different deposits at one bank are insured, the FDIC has an online Electronic Deposit Insurance Estimator (EDIE) to make it easier to decipher. If you plug your account and amount information into EDIE, it will calculate your insurance coverage so you can know if any of your deposits are at risk.
Step 3: Diversify your accounts (if over the $250,000 threshold)
If your deposit accounts at one bank exceed the $250,000 FDIC threshold, you will not get your money back if that bank folds.
A simple and surefire way to protect that money is to open a new account with another FDIC-insured bank and deposit the amount over the threshold into it. By spreading your money across banks, you can be sure it is fully covered. And there are no limits to the number of bank accounts you can have insured.
Of course, you can also explore investing in other vehicles that might produce better returns than one of your bank accounts. If that’s of interest, please call 609-580-0088 or email us here at Van Leeuwen and Company, and we can discuss your options. As you can hopefully tell from our blog, we enjoy sharing our financial knowledge so you can enjoy financial freedom.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.