This is an excerpt from Dollar Scholar, the Money newsletter where news editor Julia Glum teaches you the modern money lessons you NEED to know. Don't miss the next issue! Sign up at money.com/subscribe and join our community of 160,000+ Scholars.
As a kid, I used to collect special coins: Kennedy half-dollars, Lincoln wheat pennies, bicentennial quarters, et cetera. I kept them tucked away in a small wooden chest I called my “treasure box,” which I hid in a top-secret spot in my bedroom.
Although the coins weren’t super rare, they were hugely valuable to me. I couldn’t risk losing them among my toys and books. The treasure box method allowed me to know 1) where they were at all times and 2) that they were safe from my brothers’ (literally) sticky fingers.
I’ve long since abandoned my numismatic tendencies, but I’ve been thinking about my treasure box in the wake of the Silicon Valley and Signature bank collapses this month (and the more recent struggles of First Republic). I'm wondering if I actually had the right idea all those years ago.
Is my money safe in the bank?
David Schiff, head of retail and consumer banking at West Monroe, responded with a resounding “yes” when I called him to ask. As long as my money is in a bank that’s backed by the Federal Deposit Insurance Corporation and meets certain requirements, he says, it’s “completely safe.” No need to worry about it.
The FDIC is an independent agency that was established in 1933 after thousands of banks shuttered during the Great Depression. Since then, it likes to boast, “no depositor has ever lost a penny of FDIC-insured funds.”
The FDIC backs up to $250,000 per depositor, per account type, per institution (there are ways to get around these limits, but those are the general rules). If an FDIC-insured bank goes under, the agency will make sure I get that money back. Full stop.
Part of the initial issue with Silicon Valley Bank is that it catered to a wealthy clientele composed largely of startup founders. Something like 94% of its domestic deposits weren’t FDIC-insured because they were over that $250,000 maximum, which caused customers to panic at the first sign of trouble.
To prevent a more serious banking crisis, the U.S. Department of the Treasury decided to step in and guarantee that all deposits, not just the ones under $250,000, would be returned to customers.
I don’t need to freak out because I don’t have more than $250,000 in any bank account. And even if I did, there’s a good chance the government would take care of me anyway.
Schiff says the implosion of Silicon Valley and Signature — the second- and third-largest bank collapses in American history — was a unique case to begin with. Most banks don't have that degree of concentration within one industry and/or geographic market that exposes them to this risk. We’re not talking about a giant like Bank of America randomly collapsing.
“Overall, the banking system is extremely stable, but there are institutions that made decisions that led to them being less profitable,” Schiff says. “That’s because of their concentrations — not a systemic problem like we had in 2008 when the underlying mortgage market impacted everybody.”
In general, banks are an efficient way of moving money around, says Joe Maugeri, the managing director for corporate relations at the CFP Board. I can store funds, receive direct deposits and pay my bills. It’s harder to do that if I insist on putting all my cash under my mattress or in a treasure box hidden in my bedroom.
(Plus, I could get robbed.)
Having money in a bank also lets me earn money from my money. That's crucial because inflation erodes my purchasing power over time, meaning that the same dollars buy fewer goods as the years go on. And I don’t know if you’ve heard, but inflation has been historically high lately.
When I put my money in a bank, Maugeri says, I’m insulating myself against that because I’m getting paid in return. Standard checking accounts typically don’t offer the greatest interest rates, but products like high-yield savings accounts, money market accounts and certificates of deposit (CDs) do.
“Individuals have more to worry about from inflation than bank failures,” Ian Rosen, chief revenue officer at Magnifi, tells me via email. “This is a time when your money simply has to be working for you.”
It’s not a bad idea to use this mini crisis to make sure my bank of choice is FDIC-insured and, depending on my goals, move money over the $250,000 threshold into investment products. I can investigate how I might go about pulling my money out if I felt I had to…
…but I don’t need to actually do it, especially because if I decided to withdraw everything at the same time everyone else did, that's called a bank run.
It's not only disastrous — it’s unnecessary, given the safeguards that are in place.
“Depositors should feel like they can sleep at night,” Maugeri says. “It’s doubtful someone’s going to lose money.”
The bottom line
Despite recent upheaval, my money is secure in the bank as long as it’s in a qualifying account under $250,000 at an FDIC-backed institution. The government will step in and protect funds up to that limit (and, in the case of those recent bank failures, even beyond it).
Taking all my cash out of the system amounts to shooting myself in the foot because, in this inflationary environment, I need to be earning interest so I can keep up with rising prices.
The sky is not falling.
“There’s not a reason for consumers to be concerned,” Schiff says.