After the recent failures of Silicon Valley Bank and Signature Bank, you may wonder if your money is safe in a U.S. bank or credit union account. And while they’re reasonably rare (fewer than three per year), bank failures do happen.
Fortunately, the United States has systems in place to ensure failed banks don’t lead to the types of personal catastrophes we saw during the Great Depression, including regulatory oversight and a deposit insurance program.
But are those systems enough to protect your hard-earned cash, and can you choose a bank with the lowest risk and greatest odds of long-term success?
What Is Deposit Insurance, & How Does It Safeguard My Deposit?
Federal deposit insurance backed by the U.S. government protects the money in your covered accounts against a bank failure. If your money is in a protected financial institution, and that institution fails, the government covers that money. No depositor has ever lost their government-insured funds.
Its primary purpose is to promote confidence in the banking system, ensure financial stability, and prevent bank runs or mass withdrawals by depositors during times of economic uncertainty.
How Does Deposit Insurance Work?
Banks and credit unions must pay deposit insurance premiums each month just like you do for your car or health insurance. In return, the federal government, through federal agencies known as the Federal Deposit Insurance Company (for banks) and National Credit Union Administration (for federal credit unions), insures all eligible accounts for up to the federally mandated limit.
If a bank fails, the government steps in to ensure you don’t lose your money. Often, it sets up a bridge bank that allows depositors to access their money until someone purchases the defunct bank or customers have had adequate time to find a new bank.
When SVB failed, the government stepped in immediately to create a bridge bank (cleverly called Silicon Valley Bridge Bank) and make funds available to depositors. Sometimes, the FDIC or NCUA deposits funds into an insured bank and creates an account for each insured customer. Other times, depositors receive a check for the insured balance, typically within a few business days of the original institution’s closure. But you may have to file a claim to access your money or get coverage.
FDIC and NCUA insurance backs deposits of up to $250,000 per account holder per account type. If you have more than that amount, you must keep your money in different account types or at different banks to ensure full coverage. Or you can opt for a private bank that carries private insurance with higher limits.
Note that joint accounts are covered for up to double the amount an account with only one owner is, even if one of the account holders is a minor.
Also note that some cash-management accounts and neobanks offer coverage in excess of the FDIC limit through a sweep network. They deposit your funds across various insured banks to provide coverage of $2 million or more per depositor.
Both banks and federal credit unions must carry this insurance. Otherwise, they cannot make a claim of being a bank or federal credit union.
For example, neobanks don’t carry deposit insurance and technically aren’t banks. That’s why the fine print on some fintech websites reads, “Not a bank.” Usually, that fine print also shares the name of the bank backing the funds. But if the account isn’t backed by a bank or credit union, tread carefully.
Similarly, while not banks themselves, brokerages and investment apps like Robinhood, person-to-person payment platforms like Paypal or Venmo, and non-bank financial companies often hold deposits in the FDIC-insured accounts of partner banks.
For instance, funds held in Robinhood’s cash-management account are FDIC-insured by the partner bank. Likewise, money in your Paypal savings account is FDIC insured by Synchrony Bank.
Notably, some states require state-chartered credit unions to carry federal insurance. But others have no such requirements. Always look for the FDIC-insured or NCUA-insured logos to ensure your money is safe.
Types of Deposits Covered
Types of accounts insured by the FDIC or NCUA include but are not limited to:
- Money market deposit accounts
- Time deposits like CDs (certificates of deposit)
- Negotiable order of withdrawal accounts
- Cashier’s checks, money orders, and other official payment instruments issued by a bank
That means you can have up to the maximum insured amount in all those types of accounts, including double in any that are joint accounts with someone else, before another bank is your only option. That said, if you have that kind of money, diversifying your holdings into different banks isn’t a terrible idea.
Note that FDIC and NCUA insurance don’t protect against fraud. Check with your bank, credit union, or financial technology company to determine whether your account has protection against fraud or scams. Read the fine print on your financial institution’s website to see if it carries fraud insurance and the limits.
Other Factors Affecting Deposit Safety
You might still be wondering: Is my bank deposit really safe? While FDIC insurance can give you peace of mind, many factors influence deposit safety.
Diversification of Deposits
Now that you know FDIC and NCUA insurance only covers deposits up to $250,000 per depositor per account type, you may be wondering what you can do to prevent your account from exceeding that amount.
First, you can add a joint account holder to double your coverage. Also, diversifying your deposits across multiple financial institutions ensures coverage for all your money.
Some banks offer what they call “relationship banking” with special privileges for depositors that hold certain amounts in their bank. Typically, you can spread the total amount across deposit accounts. For example, you can have a money market, CD, savings account, and checking account, each with the maximum amount, to meet a steep minimum.
But even if you don’t have that much, you can still benefit from diversifying your funds across accounts. If a bank fails, it may take time to reclaim your deposits through FDIC insurance.
Keeping some emergency funds in a separate bank can help you in a pinch. Even if you’re living paycheck to paycheck, try to save some money in a savings account at a different bank to access in an emergency. Whether your bank fails or you’re a victim of fraud, you’ll be thankful to have a way to access some money.
Banking Regulations & Supervision
The Great Depression made it painfully apparent that banking regulations were necessary to protect regular joes from those whose money and decisions moved the economy.
During that period, the U.S. government introduced the Glass-Steagall Act to do just that. It separated investment activities from commercial banks. The act aimed to protect bank deposits from a crashing stock market and risky investments.
But in 1999, some provisions of the act were repealed to allow universal banking. Some say that led to mergers that created mega-banks while also leading to looser lending standards that eventually led to the 2008 mortgage crisis. The Dodd-Frank Act, introduced in 2010, sought to reintroduce some protections to consumers. Unfortunately, some provisions of the Dodd-Frank Act were repealed a few short years later, leaving us with the system we have today.
As of this writing, several regulatory agencies supervise the internal operations of banks, which (purportedly) help safeguard against bank failure. They are:
- The Federal Reserve, which supervises member state-chartered banks and financial holding companies
- The Office of the Comptroller of the Currency (OCC), the oldest bank regulatory agency in the U.S.
- The Federal Deposit Insurance Company, organized in 1934, and National Credit Union Administration, organized in 1970 to protect deposits up to allowable federal limits
- State banking agencies, which conduct bank examinations and construct and enforce regulations at the state level
But a handful of other agencies also help protect consumer rights when it comes to fair banking and credit practices. They are:
- The Consumer Financial Protection Bureau, which ensures financial institutions like banks and credit unions treat you fairly
- The Federal Trade Commission, which has no jurisdiction over banks or credit unions directly but has authority over companies that may hold your funds in banks, such as mortgage companies and mortgage brokers, and those who may try to get money from your bank account, such as creditors and debt collectors
- The Department of Justice, which doesn’t directly enforce laws or oversee any institution but is ultimately responsible for the proper enforcement of those laws and may take banks or credit unions to court on behalf of wronged customers
Bank Stability & Financial Health
Banks don’t hold all your deposits in their vaults. Instead, banks invest the money, ideally in high-yield accounts so they can profit from your deposits while offering you and other customers adequate savings returns.
However, when Signature Valley Bank failed, it had sold off government bonds and taken a $2 billion loss. That’s on top of being overextended in risky tech ventures. Tech investors like Peter Thiel began advising companies to pull their money from SVB as protection, causing a bank run.
That should have been OK — or at least better than it was. At all times, banks should have enough capital to accommodate a certain number of withdrawals. When it failed, SVB did not.
In addition to not being able to field withdrawals, it was the largest of several banks to fail in close succession, sparking fears of a financial domino effect. Then, they announced their intention to raise capital to cover the bonds they just sold off, making matters far worse. It’s a Depression-era-worthy cautionary tale.
But it’s not like there weren’t warning signs. Fortunately, there are several things you can do to evaluate your bank’s safety.
We all know that these days, you have to keep your personal information safe — and that every business that has it is one more point of potential compromise.
Banks have more than just your bank account numbers and PINs. They also have information like your Social Security number, contact information (physical and email addresses, phone numbers), and date of birth. If you use online banking to pay bills or have a credit card through the bank, they even have your account numbers for those.
That much information being compromised is a terrifying proposition. Fortunately, there are loads of laws and regulations aimed at protecting that information and your identity in general. To find out if your bank is doing everything it can, compare their cybersecurity methods to the latest available and industry-standard protections.
Those change over time, so if it’s all a little above your head, ask to speak with your bank’s information security officer or a team member. They should be able to answer your questions.
You can also look to industry blogs to find out what articles information security officers are reading. For example, RedTeam Security has some handy questions banks should be asking themselves.
Is My Bank Deposit Safe?
Consider a bank or credit union’s reputation, ratings and financial stability. If you choose a bank the government considers too big to fail, you can be assured the U.S. government will do everything in its power to keep the bank up and running. Don’t make assumptions about what size gets a bank on the list. When it failed, SVB was one of the largest banks in the U.S.
However, big banks often have high fees and low interest rates on savings. You may want to choose a smaller bank or credit union instead. That’s when it’s critical to do your research and evaluate the safety of your deposit.
Most banks and credit unions must follow specific standards stipulated by the Federal Reserve and FDIC or NCUA, for capital requirements and liquidity.
Check their financial statements to see if they’re involved in anything too risky or have too many spoons in the same pot. For example, SVB wasn’t terribly diversified. They had a lot of investments in tech. In fact, they were known for it. To make matters worse, those investments were too risky — way riskier than would have been allowed under Glass-Steagall, for example.
You can also use financial ratios to measure a bank’s financial stability. The key figure to judge a bank’s stability, the capital adequacy ratio, looks at the bank’s ability to cover liabilities and respond to credit or operational risks.
Look for a capital adequacy ratio of 8% to 12% (though that number changes over time). Regulators conduct stress tests for capital adequacy and market liquidity and have the authority to shut down financial institutions that don’t meet requirements.
The provision coverage ratio shows the bank’s ability to service its debt. You’re looking for a 70% or higher ratio here.
These numbers are important because they show the liquid assets a bank has available. One reason SVB failed is because it didn’t have enough assets to cover withdrawals.
You can also check a bank’s Standard & Poor’s credit rating, which runs from AAA to D. Avoid any financial institutions with a rating lower than BBB, and lean toward those with an A rating or higher.
When you’re choosing a bank or credit union for your hard-earned money, you want to be sure your cash is safe, first and foremost. Once you find a financial institution that provides that peace of mind through its reputation, financial rating, and deposit insurance, you can consider other factors, such as interest rates, fees, and customer service.
In addition to deposit insurance, ensure the bank you choose also has fraud protection insurance. If cybercriminals hack into your account and steal your money, deposit insurance doesn’t cover those funds.
Read bank and credit union reviews to find an account that checks all your boxes for deposit safety, fraud protection and insurance, low fees, and good customer service.