It’s a wonderful life … thanks to insurance protection

Hearing a “run on a bank” may evoke black-and-white images of 1929 or scenes from a certain classic holiday movie starring Jimmy Stewart. But just recently, a number of factors contributed to the collapse of three large banks: Silicon Valley Bank, Signature Bank and First Republic Bank.

Fortunately, we’ve come a long way since pre-1933 when a bank failure meant the customers would lose all of their money with no recourse. Now, should something catastrophic and fraudulent happen to a financial institution, account holders and investors can breathe a little easier because of protections in the form of the Federal Deposit Insurance Company (FDIC), the National Credit Union Administration (NCUA) and Securities Investor Protection Company (SIPC).

No one could be blamed for wanting to get their money out of a bank after even the faintest rumors of trouble there. It’s a natural response, but it’s just not a necessary one anymore.

In response to the thousands of banks that failed in the 1920s and early 1930s, the FDIC was established “to maintain stability and public confidence in the nation’s financial system.” FDIC protection covers deposits only. It does not extend to securities, mutual funds or “similar types of investments.” According to the independent government agency, “Since the start of FDIC insurance on Jan. 1, 1934, no depositor has lost a penny of insured funds as a result of a failure.”

Every account in banks that are backed by the FDIC are insured up to $250,000, so their account holders would receive up to that amount of their money back if the bank were to fail. That applies to every account. If a holder has multiple accounts, it will cover each of them the same way. If the amount surpasses $250,000, it doesn’t necessarily mean the account holder won’t get the rest of their money back, but it may depend on how long it takes the FDIC to recover those funds.

These recent bank failures happened for a variety of converging reasons. Fears of a financial calamity caused by the pandemic prompted the Federal Reserve to move the federal funds rate to 0% and increased the money supply (M2) more than 40% over the span of two years. After COVID’s initial shock to the economy subsided, and with stimulus checks in hand, both businesses and consumers found themselves with extra cash to spend. As banks received these deposits, and due to continued economic uncertainty, many chose to invest in Treasury bonds and other U.S. government debt securities, presumed “safe” investments. However, these instruments yielded next to nothing owing to the Fed’s stance on monetary policy caused by the pandemic.