After a tumultuous 2023 that saw some of the largest bank failures ever, the U.S. banking system appears to have stabilized. More bank failures are inevitable, however, and depositors could risk losing money any time one occurs. The first line of defense, federal deposit insurance from the FDIC, has worked reliably to date. To avoid a financial hit if your bank fails, stick to insured institutions and account types, stay under account balance limits and use different ownership arrangements.
A financial advisor can help you build a financial plan that accounts for your savings. Speak with an advisor who can help today.
Risks Associated With Bank Deposits
A bank fails when regulators take control of the bank because it’s insolvent or at risk of insolvency. This isn’t an everyday occurrence. Five banks failed in 2023 out of more than 4,500 U.S. institutions and none failed in 2022 or 2021. However, in 2010, regulators closed 134 failed banks, according to data from the FDIC.
Failure can occur due to poor investment decisions by bank managers, tough economic conditions that cause a lot of borrowers to default and, sometimes, fraud. Sometimes suspicion about a bank’s troubles causes a bank run when depositors withdraw their funds en masse. That can itself cause the institution to fail as it finds itself without enough money to pay everyone.
The Federal Deposit Insurance Corporation (FDIC) protects depositors from losing money when these events take place. Banks fund the operation through fees, meaning depositors don’t have to pay separately or sign up for it. The process provides for paying depositors the full balances of covered accounts, up to certain limits, as soon as within a few days of a bank being closed by regulators. The National Credit Union Association (NCUA) similarly protects credit union depositors.
Not all deposits are insured, however. In fact, in the FDIC’s fourth-quarter 2024 report, it said more than 40%, or about $7 trillion, of the more than $17 trillion in deposits at U.S. institutions is not covered. Often, that is because account balances can exceed the FDIC insurance limit of $250,000 per account holder and ownership category at each institution.
While no one has lost money insured by the FDIC, deposits in excess of the limits are at risk if a bank fails. Let’s say you have a $350,000 savings account at a failed bank. In this case, you would receive $250,000 from the FDIC along with a certificate for a $100,000 claim. Then you’d receive payments to satisfy the claim as the bank’s assets are liquidated. This could take years and you might receive less than your claim if the asset sales don’t bring enough to pay everyone off.
That’s a worst-case scenario and not necessarily how it usually plays out. In 2023, for instance, the FDIC agreed to pay depositors at failed banks the full amount of their balances even when they exceeded the coverage limits. In future, however, the agency might have to apply the rules more strictly. After all, the FDIC’s own financial reserves amount to only a tiny fraction of the approximately $10 trillion in deposits it insures.
The agency has other tools to protect depositors, including forcing mergers and requiring banks to follow sound practices so they don’t get in trouble to begin with. It can also borrow more money and has, ultimately, the backing of the Federal Reserve and the U.S. government. But consumers may still want to take steps to avoid losing money.
Ways to Keep Your Money Safe
Here are some ways to protect yourself from a potential bank failure:
Bank at an Insured Institution
Look for the “FDIC” logo on the bank’s website or displayed in its lobby. You can also use the FDIC’s Bank Find Suite to see if your bank is an FDIC member.
Use Insured Accounts
The FDIC covers all traditional deposit accounts, like checking, savings, money market and certificates of deposits, as well as some retirement accounts like IRAs and self-directed 401(k)s. However, money invested in stocks, bonds, mutual funds, annuities and life insurance policies is not covered, even if you bought these investment products from the bank. If you want insurance, keep your money in a covered account type.
Use Different Account Categories
The $250,000 limit per depositor, per institution applies to each account category. Common ownership categories include single, joint and revocable trusts such as payment-on-death accounts and living trusts. This means a couple could set up a pair of $250,000 single-owner accounts, as well as a pair of $250,000 joint-owner accounts, for a total of $1 million in deposits covered by FDIC insurance.
Watch Your Balances
Insurance only covers $250,000 per depositor, per institution for each account category. Your account balances may get beyond that due to earnings from interest, large deposits, an inheritance or other sources. Use the FDIC’s Electronic Deposit Insurance Estimator (EDIE) to see if your balances are within the limits.
Plan Ahead
You may keep some cash in a safe place in your home as a fail-safe. It can take days or weeks to receive an insurance payout as regulators arrange for a failed bank’s sale or liquidation and you are likely to have bills to pay in the meantime.
However, it may be riskier to withdraw a large amount of cash and keep it around your home than to leave it in an insured account. You also may not want to contribute to a bank run that can topple a bank that would otherwise survive and recover.
Financial Planning Tips
- A financial advisor can help you with your financial plan, including how your banking choices can play a role in it. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s guide to the best banks can help you identify a place to keep your deposits that pays attractive interest, charges low fees and makes it easy to get your money when you need it.
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