The sudden collapse of Silicon Valley Bank and Signature Bank have raised questions about federal protections on bank deposits.
The good news is that deposit insurance works and you shouldnt have to worry about your money.
Typically, the Federal Deposit Insurance Corporation (FDIC) only insures deposits up to $250,000.
The FDIC posts information about bank closures on its website atwww.fdic.gov.
Silicon Valley Bank wasnt a typical bank though.
It catered to technology startup companies and venture capital firms.
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So your money is safe in an FDIC insured bank, right?
What Is the FDIC?
The FDIC is an independent federal agency.
Its primary function is to protect depositors money from bank failures.
FDIC insurance is backed by the full faith and credit of the U.S. government.
In other words, the federal government guarantees your funds will always be accessible in an FDIC-insured bank.
Are Credit Unions FDIC-Insured?
Credit unions are regulated differently from banks.
The National Credit Union Administration (NCUA) charters, regulates and monitors federal credit unions.
Credit unions maintain their own federal deposit insurance through the National Credit Union Share Insurance Fund (NCUSIF).
Whether you deposit money at a bank or credit union, you could rest assured your cash is safe.
What Does the FDIC Cover?
The FDIC insures more than just checking and savings accounts.
Financial accounts covered by the FDIC:
You dont need to sign up for FDIC deposit insurance coverage.
Even if you purchase these investments from a bank, they are not FDIC insured.
It only protects your money in the event of a bank failure.
How Does the FDIC Work?
Bank runs happen when customers get nervous about a banks solvency and withdraw all their money.
We often take FDIC protections for granted.
But in many ways, the agency serves as the backbone of the U.S. financial system.
Before the FDIC was created in 1934, insurance for banks didnt exist.
Millions of families lost their entire life savings.
An estimated $140 billion in bank deposits vanished, plunging the country into the Great Depression.
To put things in perspective, about 9,000 banks failed between 1930 and 1933 4,000 banks in 1933 alone.
Their money was simply gone.
Now when banks fail, FDIC deposit insurance steps in to protect account holders.
This has helped maintain stability and bolster public confidence in the U.S. financial system.
According to theFDICs website: Since 1933, no depositor has ever lost a penny of FDIC-insured funds.
How to Check Your Banks FDIC Status
Most banks including manyonline-only banks are FDIC insured.
It is rare for a bank not to have FDIC insurance.
Some companies that offer online financial services known asneobanks arent really banks at all.
Rather, companies like Chime, Current and Aspiration are technology companies that provide financial apps and software.
However, on the back-end, your money is still safe and managed by a traditional FDIC-insured bank.
For example, Bancorp Bank and Stride Bank partner with Chime to administer banking services.
As of March 2023, 4,708 financial institutions in the U.S. were FDIC-insured.
What Happens If Your Bank Fails?
You do not need to file a claim to get your insured money.
The process happens automatically.
When a bank failure occurs, the FDIC takes one of two steps.
The most common practice is to sell deposits and loans of the failed institution to another institution.
Basically, a healthy bank takes over the insured deposits of the failed bank.
The transition is usually pretty seamless from the customers point of view.
You arent stuck with this new bank.
you’ve got the option to withdraw your funds without penalty once the transition is complete.
The FDIC is required by federal law to make insurance payments to depositors as quickly as possible.
you might usually access your funds just one or two business days after a bank closes.
If this happens, the FDIC will send a letter to you informing you of the closing.
According to theFDIC website, 562 banks have failed nationwide since 2001.
For perspective, just five banks have failed since 2018.
What Happens to Uninsured Money After a Bank Fails?
Any money that exceeds FDIC insurance limits is considered uninsured.
Even the FDIC acknowledges it can take years to sell off a failed banks assets.
Plus theres no guarantee youll get all that uninsured money back after the fact.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.
She focuses on retirement, taxes, investing and life insurance.
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