Finances FYI Presented by JPMorgan Chase
It is easy to convince yourself that the money you put into a bank account is safe and protected. In most cases, it is, and this is often because of Federal Deposit Insurance Corporation (FDIC) insurance. But knowing how FDIC insurance works, checking that your bank has it, and understanding why banks fail can ensure you are making the best choices for your financial security.
Here’s a guide to bank failures, the role of the FDIC, and how FDIC insurance safeguards your bank deposits.
What Is the FDIC?
The Federal Deposit Insurance Corporation (FDIC) was created by the United States Congress “to maintain stability and public confidence in the nation’s financial system.” Established through the Banking Act of 1933 during the Great Depression, it sought to prevent bank failures and protect consumers if they did. “Between 1929 to 1933, depositors lost about $1.3 billion when their banks failed”, reports 60 Minutes Overtime in What the FDIC Does When a Bank Fails.
During the depression, anxious consumers withdrew large sums of money, leading to bank failures. These events, called bank runs, resulted in 9,000 bank closures, equating to over a third of all banks. According to the Pew Research Center, since the Great Depression, U.S. bank failures have had a few spikes after recessions and other economic events. For example, “the mortgage meltdown and subsequent global financial crisis took down more than 500 banks between 2007 and 2014.” While troublesome, it is significantly less so than before FDIC monitoring.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act increased FDIC-protected deposits to $250,000 per ownership category. “That guaranteed $250,000 does not come from taxpayers, nor is it financed from the federal budget,” explains the 60 Minutes report. Banks pay an assessed fee quarterly, and those funds are invested in Treasury securities to earn interest. “No depositor has ever lost a penny of insured deposits since the FDIC was created in 1933.”
Why Do Banks Fail?
In addition to bank runs, banks can fail when too many bad loans default, as was the case during the 2008 mortgage meltdown. The falling value of assets or poor investments can deplete capital reserves leading to bank failures. FDIC insurance works to prevent bank runs by assuring consumers that their money is safe. However, banks, with their backs up against the wall, can make rash decisions that spook consumers and trigger them to withdraw money.
Multiple converging issues were the case with Silicon Valley Bank (SVP), the second-largest bank failure in U.S. history when adjusted for inflation. As the Federal Reserve hiked interest rates to minimize inflation, SVP’s government bond holdings lost value, leading the bank to sell off its bond portfolio at a significant loss. Additionally, SVP’s primary customers were tech and life science companies, and almost 94% of deposits were above the FDIC insurance cap of $250,000. Alarmed by recent news about SVP, many companies withdrew their money, causing a bank run.
What Does FDIC Insurance Mean for You?
FDIC Insurance only protects your money if deposited at an FDIC-insured bank into a covered account. In the rare chance that your bank fails, how do you know if your accounts are covered?
- Use the FDCI.gov website to check if your bank is FDIC-Insured.
- Know what financial products are not covered, such as mutual funds, annuities, life insurance policies, crypto assets, and safe deposit contents.
- While neobanks or nonbank fintech companies like Chime usually partner with FDIC-insured banks, be aware that money in these accounts may not be fully covered if they fail.
- Understand insurance limits by ownership category. For example, joint accounts are insured for $250,000 per owner. Trusts are insured for $250,000 per beneficiary, while retirement accounts are generally only insured for $250,000 regardless of the number of beneficiaries.
If your deposited money is an FDIC-insured bank that fails, the FDIC will either pay funds up to the insurance limit or manage deposits until they arrange for a healthy bank to acquire the failed one. You will receive written notice from the FDIC with payment instructions and support for seeking new lenders for any loans with the bank.
For the security of your money, ensure it is in a bank covered by FDIC insurance and within the limitations. While bank closures do not occur often, you can rest more easily knowing your financial security isn’t at risk.
Finances FYI is presented by JPMorgan Chase. JPMorgan Chase is making a $30 billion commitment over the next five years to address some of the largest drivers of the racial wealth divide.
