Is My Money Safe in the Bank?

In recent years, the FDIC has managed two of the largest bank failures in U.S. history. The collapse of Silicon Valley Bank (SVB) and Signature Bank happened shockingly fast, andFirst Republic wasn’t far behind. Consumers were left with plenty of questions, but perhaps the biggest is also the most basic: Is my money safe in the bank? The good news is, yes. The federal government acts to protect bank deposits in a number of ways. The two most important, and effective, are insurance and liquidity. 

For help managing your money and preparing for potential future bank failures, consider working with a financial advisor.

The Federal Government Insures Deposits

The most direct way that the government acts is through depository insurance. For banks, this is managed by the Federal Deposit Insurance Corporation (FDIC). For credit unions, which operate similarly to banks, deposit insurance is managed by the National Credit Union Administration (NCUA).

In both cases, the government insures each depositor at each institution for up to $250,000. This means that if the bank fails and its assets are wiped out, the government will reimburse you for lost funds, up to $250,000. This amount is periodically updated to account for inflation.

Coverage applies to each depositor, which means the government will not protect multiple accounts at the same bank. This rule applies to each institution, as well. That means if you have three accounts with a single bank, you’re only protected up to $250,000. However, if you have three accounts at three separate banks, your money at each institution is protected up to the $250,000 limit. 

There are some instances in which you could have multiple accounts protected at one institution if they are different types of accounts. This applies only to depository institutions, which are places that offer products like checking and savings accounts. However, it does not apply to investment banks. While the government will reimburse you if your checking account is wiped out, it won’t make you whole for stock market losses.

The Federal Reserve also has shown a willingness to expand its footprint of protection. When Silicon Valley Bank collapsed, the government lifted this $250,000 cap. It guaranteed that it would reimburse all of the money that businesses and individuals had on deposit, including about $18 billion in uninsured cash. It did the same with Signature Bank, guaranteeing about $1.6 billion in uninsured assets.

The FDIC and the Federal Reserve Backstop Liquidity

Depository insurance is the guarantee of last resort, and the government uses it very rarely. Before reimbursing consumers, the FDIC and the Federal Reserve try to prop up a bank’s liquidity and keep it from failing. They do this in two main ways.

Lender of Last Resort

First, the Federal Reserve acts as a lender of last resort when banks need cash. This is the government’s preferred method of protecting deposits at healthy banks.

One of the major ways that a bank can fail is if too many depositors try to withdraw their money all at once. The bank might not have enough cash on hand to cover all of these demands, which can force it to sell off assets at a loss. It  might even bankrupt the institution altogether.

To prevent this, the Federal Reserve extends emergency loans to banks in need of cash. Banks can borrow money from the government to cover their immediate needs and make depositors whole. This is useful to solve cash flow crises, when an otherwise stable institution might be forced into insolvency by a short-term demand for money. The bank takes out a loan to meet its short-term demands and repays that loan with the returns on its long-term investments.

To cover particularly large liquidity issues, the Federal Reserve created the Bank Term Funding Program. This was instituted in the wake of the SVB and Signature collapses, and it will act as a lender of last resort for large institutions.

Broker of Last Resort

Lending to banks can work well for a healthy institution that has cash flow issues. Any bank, no matter how well-managed, is vulnerable to a bank run and emergency loans can cover that short-term crisis.

Loans will not work for banks that are failing though. While the government will, typically, extend loans to try and shore up an immediate crisis (such as it did in the case of SVB and Signature), that is only a stopgap solution when the bank is going out of business. 

Unfortunately, this happens more often than most consumers realize. Banks may fail because they made bad investments or lost too many customers. They can also fail because their underlying business model has gone wrong in some way.

In this case, the Federal Reserve and the FDIC act as a broker of last resort to try and sell the bank to another healthier institution. Their goal is to find a solvent bank that will take over the failing bank’s deposits and assets, effectively folding one institution into another.

When successful, the FDIC doesn’t need to reimburse depositors at all. Often, from the outside, this looks like a simple merger, and individual consumers notice no change except for the name on the door. The new institution assumes the deposits and loans of the old one. 

This is particularly important because large depositors frequently have more than $250,000 on account with their banks. One estimate by the FDIC suggests that about 45% of all bank deposits are uninsured, so mergers are a critical tool for making sure that depositors are protected against bank failures.

Depositors Are Historically Well-Protected

Banking protections are an incredibly complicated issue, and the government has a wide range of regulatory and financial tools that it uses to protect depositors. For example, the Federal Reserve conducts regular oversight of banks to look for bad investments and risky assets that might cause a failure (although, as the case of SVB made clear, this system is far from foolproof).

The takeaway is this, though: As a depositor, your money is about as safe as it can be. Ensuring that depositors feel their money is secure is a huge priority for the government, and several different agencies and entities work to make sure of that. Banks are monitored to try and prevent failures, and the Federal Reserve acts quickly to give them liquidity when needed. 

When a bank does fail, the government moves quickly to find a buyer for those assets and deposits. And if that doesn’t work, it simply cuts a check to reimburse depositors for cash that they’ve lost.

How to Maximize FDIC Coverage Across Multiple Accounts

Maximizing FDIC insurance coverage starts by understanding that the $250,000 limit applies per depositor, per ownership category, per insured institution. This means that if you hold multiple accounts at the same bank under the same ownership type, such as multiple individual accounts, they are combined for insurance purposes and only insured up to a total of $250,000. However, if you have accounts in different ownership categories, such as a single account, a joint account and a retirement account, each category is separately insured up to the limit.

Spreading your deposits across different FDIC-insured institutions is another way to increase your total insured amount. For example, keeping $250,000 at Bank A and another $250,000 at Bank B ensures that both deposits are fully protected. 

This strategy is commonly used by individuals or businesses holding balances larger than the insurance cap. However, it’s important to verify that each financial institution is FDIC-insured, which can be done using the FDIC’s BankFind tool.

You can also increase coverage through properly titled joint accounts or payable-on-death (POD) accounts. For joint accounts, each co-owner receives $250,000 in coverage, so a two-person joint account could be insured up to $500,000. For POD accounts, each named beneficiary adds an additional $250,000 in coverage. This means a single account with three named beneficiaries could be insured up to $1 million. 

These approaches require accurate account titling and up-to-date beneficiary information to qualify for expanded coverage.

Bottom Line

Your money is as safe as it can be in the bank. Between depositor insurance, emergency loans and bank sales, the government works hard to protect what you have. Although FDIC and NCUA insurance may be limited to $250,000, you may be able to provide full coverage for all your accounts when you open multiple accounts. Just be sure to check that your financial institution has FDIC insurance protection to cover your funds in case the unthinkable happens.

Consider working with a financial advisor to develop a financial strategy that best protects your personal finances from a potential bank failure.

Banking Tips

• A financial advisor can help you plan to keep your money safe. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• In addition to traditional banks, online banks have become a new issue in finance, with many wondering if they are safe for consumers.