Is the money you have in your bank account safe?

April 2nd, 2009

With all of the negative news surrounding the American banking system, some people in the media have begun questioning whether the money in their bank accounts is safe. The simple answer to this question is yes, the money in your bank account is secure.

The safety of your deposits stems from Great Depression Era legislation that insures bank accounts. The Glass-Steagall Act of 1933 set up a government agency called the Federal Depository Insurance Corporation. This is an insurance fund that guarantees the deposits in any bank account up to $250,000.

For individuals with accounts in excess of $250,000 other special insurance is available through select banks. The FDIC was set up to prevent “bank runs” – where many depositors fear the banks will not be able to satisfy their demand deposits and simultaneously cash out their accounts. This would cause banks to go under as they only keep a portion of the value of their demand deposits on location.

What this means to you is that the money in your bank account is definitely safe. Even if your bank fails–say from taking incredible losses on bad mortgage loans they have made–you are still entitled to all the cash in your bank account.

For example, if you have $5000 in the Bank of Bob and the Bank of Bob fails, the FDIC will step in and send you a check for $5000 to satisfy your demand deposit, at which point you can take your money to another bank.

With the current banking crisis in full force, many banks across the country have failed. Critics have brought up the idea that the FDIC will be satisfying so many demand deposits from failed banks that the pool of insurance money will dry up. This has caused some fear that money actually is not safe in banks under today’s unique economic environment.

The government, however, has already begun taking actions to refill the FDIC pool. This has come in the form of requests for cash from good banks. Is it fair for the good banks to have to pay for all the bad banks failures? Unfortunately, someone has to and the government is trying to avoid passing that bill onto the taxpayers. Also, the continuing support of FDIC insurance is essential to the ongoing operations of the good banks; so they aren’t exactly paying for nothing.

Also, remember that the government has the ability to simply print cash. Though this can have a devastating long-term effect on the value of a dollar bill, the government will satisfy all depositors in FDIC insured bank accounts.

The money in your bank account is absolutely safe. You should have no fear of losing your money even if your bank is rumored to be on the verge of failure. You should not consider pulling your money out of the bank in exchange for holding it in cash. This is considerably more risky as you could have the money stolen or lost.

The last thing banks need today is depositors pulling cash out of their accounts. You can rest assure that the money in your bank account is perfectly secure, even if the health of your bank is not.