Here’s How Deposit Insurance Keeps Bank Accounts Safe—Even If Its Funding Runs Dry

 A First Republic Bank customer uses an ATM on May 01, 2023 in San Francisco, California. Federal Regulators seized troubled lender First Republic Bank on Monday and sold all of its deposits and most of its assets to JPMorgan Chase. First Republic becomes the second largest bank in U.S. history to fail since Washington Mutual failed in 2008.

Photo by Justin Sullivan / Getty Images

Even in the wake of several spectacular bank failures that have diminished the funds that backstops deposit insurance, the average bank customer shouldn’t worry too much about losing their money in the event of more banking chaos, experts say.

Key Takeaways

  • About half of U.S. adults are worried about whether their insured deposits are still safe after recent bank collapses.
  • At the end of 2022, the FDIC's Deposit Insurance Fund had $128.2 billion, equal to 1.27% of all the deposits insured by the government.
  • Since then, three banks have collapsed, costing the fund a total of $35.5 billion.
  • The fund can continue paying even if it goes into the red, but the debt ceiling fight may complicate that process.

After several highly publicized bank collapses—including the second, third, and fourth-largest ones in history—many bank customers are starting to wonder if their money is truly safe. A Gallup poll last week found that about half of U.S. adults were worried about the safety of the money they’d stashed in banks and other financial institutions.

According to the Federal Deposit Insurance Corporation, those worries are misplaced—the FDIC guarantees deposits up to $250,000, far more than most individual customers have in their accounts. 

Still, the FDIC itself doesn’t have unlimited money. If enough banks flounder at once, it could deplete the fund that backstops deposits. However, experts say even in that event, bank patrons shouldn’t worry about losing their FDIC-insured money.

When a financial institution like Silicon Valley Bank fails, the FDIC steps in to get insured depositors all their money back. To do this, it uses the Deposit Insurance Fund, which is paid for by banks themselves. At the end of 2022, the fund had $128.2 billion, equal to 1.27% of all the deposits insured by the FDIC. 

Since then, bailing out depositors at Silicon Valley and Signature banks in March cost a total of $22.5 billion, and the First Republic bank rescue in April is likely to cost about $13 billion according to the FDIC.

With costs quickly mounting, it’s easy to imagine a scenario where a cascade of bank failures, especially if they’re larger banks, exhausts the fund completely. Fortunately for depositors, the fund can continue paying even if it goes into the red, as happened in the wake of the great financial crisis in 2009—the law allows the FDIC to borrow up to $100 billion from the U.S. Treasury. 

That option might not be available, however, if the bank failures coincided with a breach of the debt ceiling, which could hobble the government’s ability to borrow and lend money. 

If the government were to default on its debt, the U.S. have bigger worries than the health of the Deposit Insurance Fund. 

“We're going to be worrying about Social Security getting paid, and whether the federal government will have to pay more to borrow money for the rest of eternity,” said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the nonpartisan Brookings Institution think tank. 

In that event, one last institution could still come to the rescue: the Federal Reserve, which, during the financial crisis of 2008, gave “blank check” lending totaling $1 trillion at its peak into the financial system to keep it from collapsing completely.

“The Federal Reserve spent a lot of money that it created itself during the great global financial crisis,” Wessel said. “So if it gets to a point where some humongous bank like Bank of America or JPMorgan fails, which would be devastating, we have evidence now that the Fed will step in.”

Creating a large amount of money out of thin air would stoke inflation down the road, meaning that in the end, the cost of those bank failures would be borne by everyone in the form of higher prices.

The bottom line according to Wessel: money in banks is likely safe so long as it’s protected by the FDIC deposit insurance which—for the moment—covers accounts up to $250,000. 

“If I had more than $250,000, I don't think I'd put it in one bank,” Wessel said.

Article Sources
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  1. Gallup. "About Half in U.S. Worry About Their Money's Safety in Banks."

  2. Federal Deposit Insurance Corporation. "Restoration Plan Semiannual Update."

  3. Federal Deposit Insurance Corporation. "JPMorgan Chase Bank, National Association, Columbus, Ohio Assumes All the Deposits of First Republic Bank, San Francisco, California."

  4. Federal Deposit Insurance Corporation. "FDIC Releases Semiannual Update on the Deposit Insurance Fund Restoration Plan."

  5. Government Accountability Office. "Federal Reserve System: Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance."

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