Chances are good that you haven't thought much about the safety of your bank deposits lately. Most of the time, like now, it's just business as usual for financial institutions.
But when banks get into massive trouble, lots of bad things happen. Just think back to the last recession, when hundreds of financial institutions failed and depositors worried about the safety of their money. That's why it's good to review the basics of deposit insurance now and then— just in case.
There is a potential problem brewing now because banks are finding it harder to make money on the spread between what they earn on loans and pay on deposits, and this pressure from low interest rates could worsen.
"With the recent lowering of short-term interest rates and inversion of the yield curve in the second quarter, new challenges for banks in lending and funding may emerge," warned Jelena McWilliams, chairman of the Federal Deposit Insurance Corp.
If the economy slipped into recession, that too would cause problems for banks.
But we're not there yet, and the economy, while slowing, remains on a growth path.
For now, safety concerns are deep on the back burner. The number of problem banks, 56, recently dropped to its lowest quarterly level since early 2007, back when the Great Recession was just getting started. Bank profits are up, problem loans way down and the industry has shown improvement and resiliency in other ways.
Of special note, giant banks likely would be able to continue lending and maintain operations in a severe recession, thanks to large accumulations of capital, the Federal Reserve said in its latest stress-test announcement.
"The nation's largest banks are significantly stronger than before the crisis and would be well-positioned to support the economy even after a severe shock," said Randal Quarles, a Fed vice chairman, in a prepared statement.
Yields are down, deposits are up
Plus, depositors have remained loyal. The public now holds a record $7.7 trillion in insured deposits even though yields have dropped by more than half over the past decade. Consumers have grudgingly accepted the low payouts. They continue to rate their banks highly for overall satisfaction, according to an American Bankers Association survey last October.
Javier Rodriguez Soler, president and CEO of BBVA USA, a bank operating in Arizona and other Sunbelt states, said what keeps him up at night isn't recession risks or bank-safety concerns butattracting more clients.
During an interview in Phoenix last month, Soler said the industry has become stronger and more prudent over the past decade or so. He predicted that the next recession, when it comes, will be mild and not a serious threat.
More federal insurance backs deposits
FDIC deposit insurance, a key buffer that gives confidence to consumers in good times and bad, is in much better shape than it had been.
This fund now holds a record $107 billion, enough to cover 1.4% of insured deposits. The ratio fell below 0% in 2009 and 2010, when nearly 300 banks failed. When the fund is too low, the FDIC calls on healthy banks to ante up more money through higher insurance premiums. Insurance is a federal guarantee, so the FDIC can borrow from the government in a pinch.
As for failures, just one bank has gone under since the end of 2017. Nearly all of the nation's banks are insured by the FDIC, as are nearly all credit unions, which are covered by a separate but similar agency, the National Credit Union Administration.
You can insure more than $250,000
The FDIC's basic coverage amount is up to $250,000 per person per bank, but you could hold more than $250,000 at a particular bank and still be covered, such as if you also have a joint account or certain types of retirement accounts.
In short, your coverage could exceed $250,000, depending on how your accounts are owned. The FDIC provides specific examples of titling nuances under the "deposit insurance" section on its website, fdic.gov, or here.
If you're fortunate enough to have deposits that exceed $250,000 but are concerned about coverage, you can extend it by spreading your money among different banks. The $250,000 limit also applies at credit unions.
Not all bank investments are insured
For consumers, one key lesson involves understanding the investments on which deposit coverage applies compared to those where it doesn't.
The FDIC's insurance fund covers deposits including checking and savings accounts, certificates of deposits and money-market accounts. What it doesn't cover are stocks, bonds, annuities, mutual funds and other investments, even if they were purchased in a bank.
Money-market mutual funds aren't deposits and thus don't receive FDIC backing, though they have a track record of high safety.
Depositors rarely lose money
Even during periods of rising bank failures, such as the slump from 2009 through 2011 — a three-year period when 390 banks went under and the deposit fund was temporarily depleted— most depositors weren't in danger of losing money. Still, this guarantee applies only to insured deposits. People holding more than $250,000 could lose a portion of their balances.Roughly $5 trillion of deposits currently aren't insured.
The FDIC looks for strong banks to take over troubled institutions. When a white knight emerges, it typically assumes most if not all outstanding deposits, including those above the $250,000 limit. That helps to protect people with more cash on deposit and make losses rare.
Bank safety right now shouldn't be a concern for anyone. But low yields might linger for quite a while longer, and they remain a bigger challenge for depositors.
Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.
