When it comes to the security of the cash we have in our bank or local credit union, we often don’t give it a second thought – and for good reason. Numerous checks and balances are in place to ensure the security of our deposits and their availability when needed. Additionally, government-backed insurance provides an added layer of protection.
Recent Bank Collapse Raises Concerns:
However, recent news about the collapse of Silicon Valley Bank has left many individuals wondering about the safety of their funds and whether the money they have in their bank is secure. You may also be curious about what the bank does with the money you deposit.
What does the bank do with my money?
When you deposit money in the bank, it is then lent to someone else in the form of a loan. While banks are required by law to retain a portion of the deposited money (typically around 10% for most banks), the majority – 90% – is sent elsewhere.
The Role of Banks:
Banks take deposits, issue loans, and collect loan payments to maintain their cash balance. This process ensures they have sufficient reserve capital in cash to facilitate customer withdrawals. As long as there isn’t a run on the bank, the system operates smoothly. However, historical instances and more recent examples have demonstrated that loss of faith in a bank or the banking system can lead to bank runs and subsequent failures.
Understanding FDIC Insurance:
To address these concerns, the Federal Deposit Insurance Corporation (FDIC), an independent agency of the US government, was established in 1933 during the Great Depression. Its primary purpose is to provide deposit insurance for banks and savings institutions in the US.
FDIC insurance safeguards depositors in the event of a bank failure. If a bank is unable to return depositors’ funds, the FDIC steps in and compensates them. Currently, the FDIC insures deposits up to $250,000 per depositor, per ownership category, per insured bank.
Types of Deposits Covered by FDIC Insurance:
FDIC insurance covers most types of deposits, including checking accounts, savings accounts, and certificates of deposit (CDs). However, it does not cover investments such as stocks, bonds, or mutual funds.
Safety of Deposits in Credit Unions:
Credit Unions are not protected by FDIC insurance, but they are backed by the National Credit Union Administration (NCUA), a government entity created to safeguard credit unions and their depositors. Like the FDIC, the NCUA currently provides up to $250,000 of protection in the event of a credit union failure.
Ensuring Deposit Insurance:
To ensure your funds are insured, select an FDIC or NCUA-insured bank or credit union that offers deposit protection through insurance in the unlikely event of a bank failure. Keep your deposits within the FDIC limit of $250,000 per depositor, per account ownership category. If you have deposits exceeding this limit at one bank, consider diversifying your funds across multiple banks or account ownership categories to guarantee full insurance coverage.
Maximizing Deposit Insurance:
Maximize your deposit insurance by utilizing multiple accounts. For example, opening a joint account with your spouse would provide insurance coverage of up to $500,000 ($250,000 each), rather than the standard $250,000 limit. The FDIC recognizes various ownership categories, including:
- Single accounts
- Joint accounts
- Irrevocable Trust accounts
- Revocable Trust accounts
- Employee Benefit Plan accounts
Additional Steps for Deposit Safety:
In addition to relying on FDIC insurance, there are other measures you can take to ensure the safety of your deposits. Consider spreading your funds across multiple banks to avoid exceeding the maximum insurance limit at any single institution. Regularly monitor your bank’s financial health and regularly review your account activity. This proactive approach allows you to identify any potential issues or errors and ensures that you stay within the FDIC insurance limit.
Considering Inflation and Investment Options:
It’s important to be aware of the risks associated with keeping your money solely in the bank. One such risk is the impact of inflation on the value of your money over time. Inflation can erode the purchasing power of your funds, meaning you’ll be able to buy less with your money in the future than you can today.
To combat this, consider exploring alternative options for your savings. High-Yield Savings accounts or Money Market accounts typically offer higher interest rates compared to traditional checking or savings accounts. If you don’t require immediate access to your funds, Certificates of Deposit (CDs) offer higher interest rates, although they do tie up your money until the CD’s maturity date. Additionally, government savings bonds such as I bonds or EE bonds can provide another avenue for investment.
While the possibility of a bank failure exists, historically, the likelihood of such an event occurring is very low. In the rare instance of a bank failure, deposit insurance, such as FDIC or NCUA coverage, protects your funds as long as they fall within the specified limits. We recommend regularly reviewing your accounts and taking full advantage of different account types to ensure coverage. By doing so, you can find peace of mind, tune out unnecessary concerns, and rest easy knowing your deposits are protected.