Is my money safe in the bank during a recession?

The short answer is yes, and here’s why

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Whenever the country is facing a possible recession, people naturally worry about the safety of their money and how much money they might lose. Rest assured: If your money is held in a traditional deposit account with a bank insured by the Federal Deposit Insurance Corporation (FDIC), it’s in one of the safest places.

Key insights

  • Your money is safe in an FDIC-insured bank account because at least $250,000 of your deposits are protected by deposit insurance.
  • The returns you earn on the funds you place in a traditional deposit account aren’t tied to an index, like the stock market, so your account won’t lose value if the market performs poorly.
  • You might consider an alternative to your bank account if the bank you’re using isn’t FDIC-insured, if you have more money on deposit than FDIC insurance covers or if you want to earn a greater return on your deposits.

Why your money is safe in a bank account

Your money is safe in an account with a national bank or online bank for three primary reasons.

Most banks are FDIC-insured
The FDIC was established in 1933 in response to the events that led to the Great Depression. Before this, funds held in bank accounts were not protected from losses if a bank failed. If depositors had any concerns about the market, the economy or a bank, it could result in a run, in which many depositors take their money out of a bank at once.

Banks use some of the money customers place on deposits for purposes like funding loans.  As a result, banks sometimes didn’t have enough cash on hand to give depositors all their money in a run. The results were catastrophic to the bank, the market and the overall economy. In fact, during the Great Depression, about 9,000 banks failed and depositors lost about $7 billion in assets, according to the Social Security Administration.

To put this in context, the FDIC reports 561 bank failures from 2001 to 2022.

If your money is in a covered bank account with an FDIC-insured bank, at least $250,000 of it is protected from losses if your bank fails. Covered accounts include checking accounts, savings accounts, money market accounts and certificates of deposit (CDs).

The federal government oversees banks
Several divisions of the U.S. government monitor the safety and soundness of banks, including the FDIC, the Office of the Comptroller of the Currency and the Federal Reserve. The goal is to foster a stable financial market.

If government reviews reveal concerns about a bank, they require the bank to take action to resolve the issues. In addition, the government offers bank bailouts to prevent failures, as it did during the Great Recession of 2007 to 2009.

If a bank does fail, the FDIC takes one of two actions. The first is arranging for a bank in good financial condition to buy the failed bank. The new bank then gives depositors immediate access to their deposits up to the insured limit.

The other action the FDIC may take is to issue direct payments to the failed bank’s depositors for the amounts in their accounts up to the insured limit.

Returns are not tied to an index
The funds you place in traditional deposit accounts are not tied to an index, like the stock market. Instead, returns are in the form of interest earnings paid to you by the bank. When you open a deposit account, the bank will tell you how much interest you’ll earn and how it’s paid to you.

Most interest-bearing deposit accounts earn a variable interest rate that fluctuates with changes in the market. Others, like CDs, have a fixed rate that doesn’t change.

Because your returns are tied to the interest rate you’ll earn and not an index, you’re not at risk of losing the money you deposit. Rather, your money will grow as you earn interest.

Keep in mind some banks now offer index-linked CDs. These CDs might lose value, since they are tied to an index and might not be fully covered by deposit insurance. Use extra caution if you open this type of deposit account.

» MORE: Best Online Brokers

When you shouldn’t keep your money in a bank account

In general, bank accounts are a safe place to store your money. However, there are times when you might want to keep your money elsewhere. Gates Little, the president of The Southern Bank Company in Gadsden, Alabama, states that the main reasons for not using a bank revolve around FDIC insurance and if “your interest rate is lower than the rate of inflation, because the decrease in purchase power isn't being offset by the interest.”

Other reasons you shouldn’t keep your money in a bank account include:

1. The financial institution isn’t insured

You can find out if your bank is insured by the FDIC by using the FDIC’s BankFind tool. Banks are also required to disclose if they’re FDIC-insured. These disclosures should be displayed online and prominently in bank branches.

Many credit unions are also covered by deposit insurance. The National Credit Union Administration (NCUA) offers deposit insurance of at least $250,000 on deposit accounts held at NCUA-insured credit unions. So, your funds are just as safe at an NCUA-insured credit union as at an FDIC-insured bank.

2. Your deposits exceed FDIC insurance limits

FDIC deposit insurance protects at least $250,000 of the money you have in deposit accounts at each insured bank. If you exceed the deposit insurance limits at any one bank, you can move some of your funds to deposit accounts at other FDIC-insured banks.

FDIC-insured accounts are protected up to $250,000 per depositor. Covered accounts include checking and savings accounts.

If you don’t want to spread your deposits around on your own, many banks will do it for you. It’s a common service offered by banks’ wealth management groups.

3. You’re concerned about the safety and soundness of your bank

The goal of FDIC insurance is to protect depositors from losses if a bank fails, so it’s only used when banks aren’t in good financial health. As previously discussed, the federal government rigorously evaluates the health of financial institutions. However, you can also monitor the health of your bank.

If the federal government has concerns about the safety and soundness of a bank, it’ll make the bank take corrective actions to address the issues. Depending on the severity of the issues, you may even hear about the issues in the news, particularly if banks are fined by the government.

Gabe Krajicek, CEO of Kasasa, a fintech company that works with the community banking industry, said: “You can further protect yourself by monitoring the health of your financial institution and be aware of any signs of trouble. When you bank at a community bank or credit union, you can speak to the CEO or president directly if you are ever concerned about the health of your financial institution.”

Even if your bank isn’t in good financial condition, at least $250,000 of your deposits with an FDIC-insured bank are protected in case the bank fails. In the event of a bank failure, the funds you have on deposit above this amount may not be protected, making it particularly important to consider the safety and soundness of your bank.

4. You want a greater return on your money

Consider your financial goals when choosing where to put your funds. For example, if you’re putting money away for retirement, you may be better off using a 401(k) or individual retirement account (IRA) because these account types can generate more earnings over the long term.

Daniel Colston, a certified financial planner and the CEO of Upward Financial Planning in Roanoke, Virginia, says he advises clients to think about the consequences of stockpiling cash due to a fear of investing.

“Taking too much risk often results in losing money; taking not enough risk often results in not having enough money for retirement,” he said. “In almost all cases, it's important for people to go over their financial decisions with a financial advisor in order to ensure their decisions align with their financial plan.”

» MORE: Alternatives to savings accounts: where is the safest place to keep my money?


Can you lose money in the bank during a recession?

FDIC-insured banks are protected from losses if the bank fails. You won’t lose this money if your bank fails during a recession or at any other time.

You can use the FDIC’s BankFind tool to see if your institution is insured, and you can use its Electronic Deposit Insurance Estimator to see how much of your money is covered by insurance.

Should I withdraw my money from the bank when there’s a recession?

You should not withdraw your money from a bank when there’s a recession unless you already planned to do so (e.g., to put a down payment on a house) or it’s a part of your routine (e.g., for paying bills).

Assuming your funds are on deposit with an FDIC-insured bank, at least $250,000 is backed by a government guarantee, so you’re protected from losses up to this amount even if the bank fails.

Can banks seize my money during a recession?

No, banks cannot seize your money during a recession. When you place your money in an FDIC-insured bank, at least $250,000 of your deposits are protected from losses if the bank fails.

Bottom line

Banks are a safe place to store your money, even during an economic downturn or recession. However, make sure to choose an FDIC-insured bank and open a covered deposit account (e.g., checking account, savings account, money market account or CD). Investments in the stock market or similar funds are not FDIC-insured.

Remember that deposit insurance generally covers only $250,000 of your deposits at each bank. If you have more than $250,000 on deposit at a single bank, consider spreading it between multiple FDIC-insured banks to maximize your coverage.

You should also consider your financial goals when deciding where to put your money. Depending on your goals, you might be better off choosing a different type of account than a bank account, even if it comes with a higher level of risk. For example, you’ll generally earn greater returns in the long run if you place your retirement funds in a 401(k) or IRA.

Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. Federal Deposit Insurance Corporation, “ Are My Deposit Accounts Insured by the FDIC? ” Accessed Feb. 15, 2023.
  2. Federal Deposit Insurance Corporation, " Bank Failures in Brief – Summary 2001 through 2022 ." Accessed Feb. 16, 2023.
  3. Federal Deposit Insurance Corporation, “ BankFind Suite: Find Institutions by Name & Location .” Accessed Feb. 15, 2023.
  4. Federal Deposit Insurance Corporation, “ Deposit Insurance FAQs .” Accessed Feb. 15, 2023.
  5. Federal Deposit Insurance Corporation, " History of the FDIC ." Accessed Feb. 16, 2023.
  6. Federal Deposit Insurance Corporation, " Managing the Crisis: The FDIC and RTC Experience — Chronological Overview ." Accessed Feb. 16, 2023.
  7. Federal Deposit Insurance Corporation, “ Deposit Insurance .” Accessed Feb. 15, 2023.
  8. Federal Deposit Insurance Corporation, “ The First Fifty Years .” Accessed Feb. 16, 2023.
  9. Federal Deposit Insurance Corporation, “ Welcome to the FDIC’s Electronic Deposit Insurance Estimator (EDIE) .” Accessed Feb. 15, 2023.
  10. Federal Deposit Insurance Corporation, " When a Bank Fails - Facts for Depositors, Creditors, and Borrowers ." Accessed Feb. 16, 2023.
  11. Federal Reserve History, " The Great Recession ." Accessed Feb. 16, 2023.
  12. National Credit Union Administration, " Deposits Are Safe in Federally Insured Credit Unions ." Accessed Feb. 16, 2023.
  13. Office of the Comptroller of the Currency, " Are index-linked Certificates of Deposit (CDs) FDIC insured? " Accessed Feb. 16, 2023.
  14. Office of the Comptroller of the Currency, “ What is an index-linked certificate of deposit (CD)? ” Accessed Feb. 16, 2023.
  15. Social Security Administration, " Social Security History ." Accessed Feb. 16, 2023.
  16. U.S. Department of the Treasury, " Troubled Assets Relief Program (TARP) ." Accessed Feb. 16, 2023.
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