- Banking regulation has changed over the last 100 years to provide more protection to consumers.
- You can keep money in a bank account during a recession and it will be safe through FDIC and NCUA deposit insurance.
- Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.
Recessions are a normal part of the business cycle. Nevertheless, they're still scary to think about, especially when concerns of a recessions start to rise in the news. If you start to hear economists talking about a possible incoming recession, you might wonder about your money's safety.
The good news is that your money will be likely secure in a bank account. Regardless of where you bank — at one of the best banks or at a local bank or credit union — there are policies in place to protect people's money. Here's what you need to know about banking during economic downturns.
What happens to banks in a recession?
Impact of economic downturns on banking institutions
Historically, the number of U.S. bank failures has peaked during periods of economic decline. According to Pew Research, two of the biggest banking crises occurred around times of recessions — between 1980 and 1995 and between 2007 and 2014.
Most people also think about the Great Depression when it comes to bank failures. During the Great Depression, 9,000 banks failed. People who had bank accounts at these financial institutions lost all their money.
The U.S. government has since implemented policies to protect consumers and their deposits, though. The Federal Deposit Insurance Corporation (FDIC) was established in 1933 in response to the bank failures.
"The crucial thing to recognize about the Great Depression and what's come after that is the kind of bank failures that we had prior to 1934 are very unlikely to occur again because the United States created deposit insurance," adds Jeffrey Miron, a senior lecturer of economics and director of undergraduate studies at Harvard University.
Through the Banking Act of 1933, the FDIC could protect consumer bank accounts through deposit insurance. Miron says people's incentives changed after this new policy was created.
"If you believe the federal government's promise, then you don't have to worry that other people might be trying to get their money out first," says Miron.
Banking failures during the Great Recession
Significantly fewer banks shut down during this period of economic downtown than during the Great Depression. According to the FDIC, approximately 500 bank failures occurred between 2008 and 2015. In comparison, about 4,000 banks failed in 1933 alone.
Since bank accounts were backed by FDIC insurance, the Great Recession didn't impact depositors in the same way the Great Depression did.
"Depositors today never lose a cent even beyond the deposits that are legally insured, and the reason is, when a bank gets into trouble, the FDIC basically looks for acquiring banks, and all the deposits are transferred to the acquiring banks. That happened in the 2008 crisis," says Charles Calomiris, a Henry Kaufman professor emeritus of financial institutions in the faculty of business and professor emeritus of international and public affairs at Columbia Business School.
You can rest assured that your money will likely be safe at a financial institution, and you won't need to take it out of your bank account.
"It's very unlikely for history to repeat itself," says Maggie Gomez, CFP® professional and owner of Money with Maggie. "I would still have trust in the banking system, especially over keeping your money in your house or someplace that is exposed to much more likely risks of loss."
How your money is protected
Role of the FDIC and NCUA
Money deposited into bank accounts will be safe as long as your financial institution is federally insured.
The FDIC and National Credit Union Administration (NCUA) oversee banks and credit unions, respectively. These federal agencies also provide deposit insurance.
When a financial institution is federally insured, money deposited into a bank account will be secure even if the financial institution shuts down. Your money will not be lost. It is usually transferred to another bank with FDIC insurance, or you'll receive a check.
Savings accounts, checking accounts, money market accounts, and CDs are examples of federally insured bank accounts. Up to $250,000 is secure in individual bank accounts, and $250,000 is protected per owner in joint bank accounts.
Brokerage accounts usually aren't insured by the NCUA or FDIC. You should do your research to learn more about brokerage accounts to better understand how these accounts work.
Extended federal insurance coverage
Various financial institutions, like SoFi and Axos Bank, have bank accounts with enhanced federal insurance coverage for up to millions of dollars. This means that the institutions have a deposit program where money beyond the maximum FDIC insurance limit is put into FDIC-insured accounts at partner banks.
Extended federal insurance coverage isn't just specific to checking and savings accounts. Certificate of Deposit Account Registry Service (CDARS) of IntraFi Network Deposits allows you to access millions of dollars on FDIC coverage on CDs, too.
Risk factors to consider
Bank health indicators
A bank failure can occur when a financial institution doesn't meet its obligations. For example, if a bank becomes insolvent — its liabilities are more than its assets — it will be shut down.
Sometimes the perception of a bank's overall financial performance can also cause problems. Bank runs occur when many people become worried about their money and start withdrawing it simultaneously. If banks lose too much of their cash reserves, they can collapse.
Role of government and central banks in stability
The FDIC and NCUA have deposit insurance limits at financial institutions. If you deposit more than $250,000 in an individual bank account, any money that surpasses the deposit insurance limit isn't protected. These government agencies do not guarantee that you'll get uninsured deposits back if a financial institution fails.
Strategies for safeguarding your money
Gomez suggests using two different banks as one way of recession-proofing your personal finances. This may be particularly helpful if you keep more than the insured deposit limit in bank accounts.
Another option is to choose a bank that's part of an enhanced FDIC insurance program, like IntraFi Network Deposits. That way, the financial institution already has a program in place to make sure your money stays protected even if you go beyond the $250,000 per depositor, per ownership category limit.
Gomez says you could have your money deposited in an online bank and a brick-and-mortar bank. You'll be able to deposit or withdraw money at brick-and-mortar locations and earn interest on a high-yield bank account at an online bank.
Financial experts generally advise keeping three to six months' worth of expenses in a bank account as an emergency fund. How much you should keep in your account may also depend on whether you're saving up for a personal goal, like a down payment on a mortgage or a new car.
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FAQs
Is my money safe in a bank during a recession?
Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.
What happens if my bank fails during a recession?
If you're wondering what happens if a bank fails, the FDIC will take control of the assets. It will look to sell the assets to another FDIC-insured financial institution. If a bank doesn't want to buy the assets, the FDIC will send all the customer's checks for the amount of their insured deposits.
How can I ensure my money is protected during a recession?
Check to see if the place where you're keeping your money is protected by FDIC or NCUA insurance. Also, be mindful that there are federal insurance limits per depositor and account ownership category at each bank. You can keep money in multiple banks to keep your money federally insured or choose a bank that offers extended FDIC insurance coverage.
Can all types of bank accounts and investments be insured by the FDIC or NCUA?
The FDIC or NCUA provides insurance for checking, savings, CD, and money market accounts. Investment accounts are not FDIC or NCUA insured.
What measures do banks take to remain stable during recessions?
Banks may make it more difficult to borrow money and increase cash reserves.
Is it safe to have more than $250,000 in a bank account?
It is safe to have more than $250,000 in a bank account if you have a joint bank account. Joint bank accounts are insured $250,000 per depositor. Individual bank accounts with more than $250,000 in a bank account may not be safe because some money is left uninsured. If a bank failure occurs, your uninsured deposits are not guaranteed by the FDIC.
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