Is Your Money Safe in the Bank? Hear from Experts on the State of the U.S. Banking System

• Author: Dorothy Jaskolski
• Posted: 2024-10-23

Financial crisis or not, bank failures are considered extremely rare in the finance world. 

That’s why the unexpected shutdowns of Silicon Valley Bank and Signature Bank, with its scope and gravity, had many consumers questioning the security of their finances in the U.S. banking system.

While President Joe Biden gave a public address at the U.S. Federal Reserve last Monday stating “Every American should feel confident their deposits will be there if and when they need them,” and despite the Federal Deposit Insurance Corp. and U.S. Department of the Treasury’s quick action to control the situation, these still fall short in easing the concerns of the people. 

Old questions are resurfacing about how safe our cash really is at the bank. To shed some light, experts share some facts that may help us discern better whether our deposits are still secure.

 

Bank Run: What Is It?

Banks are not just storage. They are a business, and they make profit by taking the money you deposit and investing it in other things. 

In other words: The overall sum of money deposited in the bank are not regularly on hand for withdrawal. 

In relation to this, a bank run is when the majority or all of a bank’s depositors run to the bank and withdraw their money en masse. With the presence of electronic banking today, bank runs can now happen faster than ever. 

The consequences of a bank run? Tomas Philipson, a professor of public policy studies at the University of Chicago and a former acting chair of the White House Council of Economic Advisers, puts it plainly, “When everyone wants to withdraw money at the same time, the bank doesn’t have the reserve to do that and they go belly up, essentially.”

In the case of SVB, it was a dizzying 48 hours. While SVB also had an unusually high percentage of uninsured deposits, there are other mid-sized banks that could be at risk of large withdrawals.

 

US Bank Failure: Will it Happen Again?

According to Stacy Francis, a certified financial planner and president and CEO of Francis Financial in New York, the unexpected shutdown of SVB could “possibly” happen to other banks. 

“This is happening, in part, because of the Federal Reserve’s sharp rise in interest rates,” Francis said.

According to her, banks currently hold long-term bonds that yield low interest rates. If the interest rate on these bonds is lower than the interest rate offered to depositors on their savings accounts, banks will experience an outflow of money that exceeds the inflow.

Further, “many banks are seeing large withdrawals from cash depositors who are looking [for higher rates] to make more money,” the expert added. “All of this is creating stress.”

However, Jude Boudreaux, a CFP and senior financial planner at The Planning Center in New Orleans, reassures us that “This doesn’t seem like a financial crisis, yet.”

“The two banks we are talking about right now specialized in riskier assets,” he noted, particularly, crypto and tech startups. “The likelihood that this becomes a national wave of bank issues seems low.”

Another thing to note though is how the top-performing rating agency, Moody changed its view on the entire banking system to negative from stable.

 

Back to Bank Runs: Should You Do It?

Short answer: It depends. 

The FDIC provides coverage for banks, insuring up to $250,000 per depositor, per account ownership category. This has been in place since 1933, and not a single depositor has lost any FDIC-insured funds due to a bank failure.

So if your deposited cash is under $250,000, you fall under FDIC coverage. In other words, don’t worry and keep your money where it is.

“You may have a short time without access, but the government has very speedy processes to get you back to using your cash in short order,” says Carolyn McClanahan, a CFP and founder of Life Planning Partners in Jacksonville, Florida.

If you have over $250,000 in deposits at a single bank, however, it may be wise to split your funds into accounts at different banks.

“Another alternative is to move some to a brokerage account and use mutual funds that are invested in government-backed securities,” McClanahan added. Some Treasury bills are currently paying as much as 5% after a series of rate hikes. This could be a smart investment option for those with excess funds.