Is my money safe in the bank? – Forbes Advisor


Editorial Note: We earn a commission on partner links on Forbes Advisor. Commissions do not affect the opinions or ratings of our editors.

As a general rule, money in the bank is safe, even during recessions or other difficult economic times. However, depending on several factors, including your balance and account type, your money may not be fully protected. Fortunately, there are things you can do to increase the security of the money you have in the bank.

Is my money safe in the bank?

To begin with, understand that your money is not actually in the bank. As soon as your bank receives a deposit, it gives that money to someone else as a loan. By law, banks have to keep some money, but it’s not a lot.

Capital requirements vary by institution, but according to the Federal Reserve, they are around 10% for many large banks. This means that 90% of the money your bank statement shows is in the bank is actually somewhere else, such as a car dealer who sold a car to someone who borrowed funds from your bank. .

The bank accepts deposits, makes loans and collects loan repayments to replenish its coffers. Meanwhile, its 10% capital reserve provides money for people who close their accounts or make withdrawals. As long as there is no racing on the bank, there will be no problems.

Historically, however, there have been times when people have lost faith in a bank or the banking system as a whole, and they have lined up in droves to demand their money. Bank runs can lead to the collapse of a bank that cannot cover requested withdrawals.

Will my bank go bankrupt?

Bank runs are scary, but they rarely happen. According to the Federal Deposit Insurance Corporation (FDIC), which insures depositors against losses in the event of bank failure, there have been no bankruptcies among the nearly 4,800 institutions it has insured in 2021. So far in 2022, the story is the same. But a typical year sees at least a handful of bank failures, so don’t think that’s impossible.

For credit unions, which are insured by the National Credit Union Administration (NCUA), the past few years have been tougher. In 2021, nine institutions closed or were placed under conservatorship, the most for a long time. Yet, with approximately 5,000 credit unions in operation, there is no need for alarm.

The good times may not last, especially if recent recession predictions are correct. Over the past 20 years, 561 FDIC-insured banks have failed. Most failed during the Great Recession years of 2009 and 2010.

What happens when a bank fails?

Usually, when a bank fails, the FDIC steps in to cover the losses and arrange for another institution to take over. Customers of the old bank may not even notice a change until their bank suddenly starts changing its name.

However, the FDIC itself may miss out if many banks fail at once, which happened in the last recession. This is because its fund to cover deposits, which is generated by insurance premiums paid by banks, is far less than the sum of its actual deposits. Consider that as of March 31, 2022, the FDIC bailout fund contained $123 billion, while total FDIC-insured deposits were nearly $10 trillion.

It’s not as worrisome as it sounds. FDIC insurance is backed by the full confidence and credit of the US government, which typically steps in if the FDIC is overwhelmed and provides the funds needed to bail out banks.

Identity theft and banking security

FDIC insurance does not cover losses due to theft, including fraud and identity theft. And it’s somewhat concerning that identity theft involving bank fraud has increased in recent years.

In the first quarter of 2022, the Federal Trade Commission received 43,412 reports of identity theft involving bank fraud, compared to 31,466 in the last quarter of 2021. But the majority of these reports in the first quarter were for new accounts opened by fraudsters , which means that there was no direct impact on the funds already deposited.

In a typical year, credit card fraud is the most significant form of identity theft consumers face. But, according to an FTC report, the vast majority of identity theft cases in 2021 involved the theft of government benefits, such as unemployment insurance.

Most identity thefts do not involve individual bank accounts or cause losses to individual customers. Unless you lose your credit card and report it, there is usually no loss to cardholders in the event of credit card fraud. And government benefit fraud does not directly affect individuals either.

How to secure money in your bank account

Money in the bank, it seems, is not as safe as it seems. But you can take steps to increase the security of your funds.

First, bank only with institutions insured by the FDIC or NCUA. Almost all US banks and credit unions participate, and many promote deposit protection in their marketing materials. Look for the logo of the respective insurance programs or simply ask a cashier.

You also want to avoid depositing too much money. Federal deposit insurance covers a maximum of $250,000 per account holder. This suggests that you should only keep $250,000 in a bank, but it’s more complicated than that.

A married couple who jointly hold an account can deposit up to $500,000 and still be fully insured. Similar coverage limits apply to IRAs, trusts, and other accounts. It can get a little complicated, but the FDIC’s Electronic Deposit Insurance Estimator (EDIE) makes it easy to determine if your deposits are eligible for government deposit insurance.

Deposit insurance limits

Another key consideration is that deposit insurance only covers certain financial products, including checking accounts, savings accounts, money market accounts, certificates of deposit, cashier’s checks and money orders. Deposit insurance does not cover stocks, bonds, mutual funds, treasury securities, life insurance, annuities or the contents of safe deposit boxes.

If you use your bank’s brokerage firm to purchase mutual funds and the firm goes bankrupt, you are not covered by federal deposit insurance. However, the Securities Investor Protection Corporation, a service similar to the FDIC for investors, can step in with coverage of up to $500,000 for your brokerage account if your broker fails.

While federal deposit insurance only kicks in if a bank fails, many banks purchase private insurance to protect against less drastic losses from theft, cybercrime, and theft. ‘identify. Banks don’t advertise it as much as FDIC insurance, so you may need to ask if your bank offers it.

Keep in mind that private insurance only protects the bank, not the bank’s individual customers. But many covered banks have a policy of turning customers whole if they fall victim to cybercrime, including identity theft.

How secure is a bank against identity theft?

Banks are using a wide and growing range of tools to limit losses from identity theft. From artificial intelligence programs that can spot indicators of fraudulent activity on an account to databases of fake identities commonly used by criminals, banks are steadily expanding their arsenal of weapons in the fight against cybercriminals. Biometric identifiers, such as retinal and fingerprint scans, and two-factor authentication that require users to enter a code sent to a phone or email address are also useful.

Banks have been doing better lately, although they are still far from perfect. A 2021 study by the AITE Group predicted that identity theft losses for all businesses would rise from $721.3 billion in 2020 to $623.2 billion in 2022. But that was before a Massive amount of identity theft linked to government pandemic benefits only inflates the numbers. According to the report, losses are now on track to increase slightly to $635.4 billion in 2023.

Financial institutions absorb most losses from identity theft without impacting customers. So there is a good chance that you will not lose money even if you are a victim of identity theft. And if you take a few modest precautions, you can reduce your risk even further and rest easy knowing that your money in the bank is almost certainly safe, in times of recession and good times alike.

Find the best online savings accounts of 2022


About Author

Comments are closed.