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- Banking regulations have evolved over the past 100 years to better protect consumers.
- You can keep money in a bank account during a recession and it will be safe with FDIC insurance.
- Up to $250,000 is safe in individual bank accounts and $500,000 is safe in joint bank accounts.
Recessions are an integral part of the business cycle. Nevertheless, they are still scary to think about. So if you start to hear economists talking about a possible
recession
you may be wondering what to do with your money.
If you’re wondering if money is safe in a bank during a recession, there’s good news: your money will probably be safe in a bank account. Here’s what you need to know about banking during an economic downturn.
Bank failures throughout history
We’ll briefly review two of the biggest economic crises in US history, so you can get a better idea of how policies have changed to give consumers more security about their deposits.
Banking failures during the Great Depression (1929 to 1939)
The Federal Deposit Insurance Corporation (FDIC) was created in 1933 in response to bank failures that occurred during the Great Depression.
“The crucial thing to recognize about the Great
The Depression
and what comes next is that the kind of bank failures that we had before 1934 probably won’t happen again because the United States created deposit insurance,” adds Jeffrey Miron, lecturer in economics and director of undergraduate studies at Harvard University.
Thanks to the Banking Act of 1933, the FDIC could protect consumer bank accounts with deposit insurance. Miron says people’s incentives changed after this new policy was created.
“If you believe the promise of the federal government, you don’t have to worry about other people trying to take their money out first,” Miron says.
Banking failures during the Great Recession (2007 to 2009)
Far fewer banks closed during this economic downtown period than during the Great Depression. According to the FDIC, about 500 bank failures occurred between 2008 and 2015. By comparison, about 4,000 banks failed in 1933 alone.
Since bank accounts were backed by FDIC insurance, the Great Recession did not impact depositors in the same way as the Great Depression.
“Today, depositors never lose a penny, even beyond legally insured deposits, and the reason for that is that when a bank is in trouble, the FDIC is basically looking for acquiring banks, and all deposits are transferred to the acquiring banks. This happened in the 2008 crisis,” said Charles Calomiris, professor of finance and economics at Columbia Business School.
Is money safe in a bank?
Money deposited in bank accounts will be safe as long as your financial institution is federally insured.
The FDIC and the National Credit Union Administration (NCUA) supervise banks and
credit unions
respectively. These federal agencies also provide deposit insurance.
When a financial institution is federally insured, money deposited in a bank account will be safe even if the financial institution closes. Your money will not be lost. It is usually transferred to another bank with FDIC insurance, or you will receive a check.
Savings accounts,
check accounts
,
money market accounts
and CDs are examples of federally insured bank accounts. Up to $250,000 is secured in individual bank accounts and $250,000 is protected per owner in joint bank accounts.
Should you withdraw money from a bank before a recession?
If you’re worried about keeping money in your bank account during a recession, you can rest assured that your money will likely be safe at a financial institution and you won’t need to withdraw it from your bank account.
“History is highly unlikely to repeat itself,” says Maggie Gomez, CFP® professional and owner of Money with Maggie. “I would always have faith in the banking system, especially to keep your money at home or somewhere with much more likely risk of loss.”
Gomez suggests using two different banks if you’re wondering where to keep your money.
For example, Gomez says you could have your money deposited in an online bank and a physical bank. You will be able to deposit or withdraw money at physical outlets and earn interest in a high-yield bank account at an online bank.
Financial experts generally advise keeping three to six months worth of expenses in a bank account in case of emergencies. The amount you should keep in your account may also depend on whether you are saving for a personal goal, such as a
advance payment
on a mortgage or a new car.