Is Your Money Safe?
There are between 90 and 150 banks on the FDIC Bank Watch List. Is yours on it? Mine is.
I bank at WAMU, so I’ve been keeping watch of the headlines about the state of uncertainty that the bank is in - “Wamu credit concerns grow,” “Wamu Falls Third Day as Investors Focus on Funding,” “Will the Fed Have to Rescue Wamu?”
So what happens if my bank goes under? Should I pull my money out while I can? If I keep it in the bank and Wamu goes bankrupt, do I get my money back?
What happens if your bank fails? This depends on…
1. If your bank is FDIC insured.
Most are, but it’s good to check. The FDIC, the Federal Deposit Insurance Corporation, was set up in response to bank failures in the 1930s. It is an industry-funded, government backed reserve of about $53 billion used to insure money you deposited in your bank in the event that bank fails. It guarantees all deposit accounts like checking, savings, IRAs, CDs, money market savings accounts (your ING accounts). It does not guarantee “investment products” like stocks, bonds, annuities, or mutual funds (your e-Trade accounts). If your bank is FDIC certified you don’t have to worry. In its 75-year history, no customer has ever lost a penny of insured deposits.
2. How much you have in your bank.
The FDIC guarantees only up to $100,000 per depositor per bank. Certain retirement accounts, like an IRA, are covered up to $250,000 per depositor per insured bank. A joint account is insured up to $200,000. Deposits in separate branches of an insured bank are not separately insured. So if you have more than $100k at a bank, even if it’s in multiple accounts, you should consider splitting your assets up into different accounts at different (FDIC insured) banks. In the case of bankruptcy, you will get your money back up to the insured limit. It may take a while, but you will get it back.
Should you take your money out now while you can?
Failures are rare, but we’ve seen seven so far this year. And bankruptcies aren’t announced. Neither the FDIC nor the bank will send you any sort of a warning or bankruptcy notice. In fact, the FDIC doesn’t even share its watch list, though the news, other rating services, and, in the case of Indymac, public servant politicians provide customers the transparency that is needed.
That’s why we have a bank run, when some news or event triggers customers to panic panic and run to the bank to withdraw their deposits for fear of insolvency (ie, no more cash). It makes sense that you’d want your money out of a bank that may go bankrupt. However, that just contributes to the insolvency. See, a bank only keeps a fraction of its total deposits on hand. The rest is invested in securities and loans. That’s why you get interest - because you’re basically loaning the bank your money, and they take that money and loan it out to make interest. Your bank doesn’t have enough cash on hand to accommodate everyone withdrawing their money at once.
So the more people withdraw, the less cash the bank has, the more likely it will default, the more people want to withdraw. It’s one of those vicious cycles.
Photo below from IndyMac’s July 2008 bank run looks a lot like that from 1933.
