How to Protect Your Money from Bank Failures (2024)

Bank failures are rare events, but they can have serious consequences for the economy and your finances. In 2023, four banks in the U.S.failed, raising concerns about the stability of the banking system and the safety of your deposits.

In this blog post, we will explain what causes bank failures, what happens to your money when a bank fails, and how to safeguard your finances from bank failures in.

What Causes Bank Failures?

Banks fail when they become insolvent, meaning they cannot pay their debts or obligations. This can happen for various reasons, such as:

• Declining profits.Banks earn money by investing depositors’ money at higher interest rates than they pay out, collecting interest from loans, and charging service fees. If these sources of income decline, the bank’s profitability suffers.

• Increasing loan defaults. Banks lend money to individuals and businesses, expecting them to repay with interest. If many borrowers default on their loans, the bank loses money and its assets shrink.
• Poor management practices. Banks are run by human beings, who can make mistakes or bad decisions.If the bank’s management is incompetent, corrupt, or reckless, it can lead to poor investment choices, excessive spending, or fraud.

What Happens to Your Money When a Bank Fails?

When a bank fails, it does not mean that your money disappears. The U.S.government has a system in place to protect depositors from losing their money in case of bank failures. This system is called the Federal Deposit Insurance Corporation (FDIC).

The FDIC is an independent agency that insures deposits up to $250,000 per account holder per account type within each financial institution. This means that if your bank fails, the FDIC will either:

• Create a “bridge bank” to temporarily run the bank until it finds a buyer or winds down the business. This allows you to access your money as usual.
• Transfer your deposits to another FDIC-insured bank. This means you will have a new account at a different bank, but your money will be safe and available.

The FDIC also sells the failed bank’s assets, such as loans, to other banks or investors. This means that if you have a loan with a failed bank, you will have to repay it to a new lender.However, your interest rate and loan terms should not change.

How to Safeguard Your Finances from Bank Failures

Although the FDIC protects your deposits from bank failures, there are still some steps you can take to minimize the risk and inconvenience of dealing with a failed bank. Here are some tips:

• Use an FDIC- or NCUA-insured institution.The FDIC insures banks, while the National Credit Union Administration (NCUA) insures federal and some state credit unions.Many neobanks, which are online-only banks, are also backed by insured institutions. You can check the FDIC or NCUA websites to verify if your bank or credit union is insured.
• Don’t exceed deposit insurance limits.The FDIC and NCUA insurance limits are $250,000 per account holder per account type within each institution. This means that if you have more than $250,000 in one account or in multiple accounts of the same type (such as checking or savings) at the same bank, you may not be fully covered. To avoid this, you can diversify your deposits across different account types or different banks.
• Research your bank’s stability.You can check your bank’s credit ratings with agencies such as Moody’s, Fitch, and Standard & Poor’s. These ratings reflect the bank’s financial strength and ability to meet its obligations. You can also check the FDIC’s bank ratings, which are based on the CAMELS system.This system evaluates six key factors to gauge a bank’s stability: capital adequacy, assets and asset quality, management capability, earnings, liquidity, and sensitivity. The higher the rating, the more stable the bank.
• Don’t panic. If you hear rumors or bad news about your bank, don’t rush to withdraw your money or close your account. This can cause a bank run, which can worsen the situation and trigger a bank failure.Instead, try to find out the facts and consult a financial advisor if necessary.

Conclusion

Bank failures are not common, but they can happen. The good news is that the U.S.government has a system in place to protect your money from bank failures.However, you can also take some steps to safeguard your finances from bank failures, such as using insured institutions, diversifying your deposits, researching your bank’s stability, and not panicking. By doing so, you can enjoy the benefits of banking without worrying about losing your money.