I’ve been getting a number of emails lately from readers concerned about their personal bank accounts in the wake of this month’s financial crisis. The truth is a number of fairly large banks have failed and the trend is likely to continue over the coming weeks. People have already begun to speculate, for example, how much longer Wachovia has before it has to shut its doors.
But a bank failure is a scary thing – especially if it’s your bank. However, here are a few things that should give you comfort.
- The vast majority of US banks are going to be fine. According to the FDIC website (Failed Bank List) only about 44 banks have failed since October 2000. That’s approximately 0.61% of the nations 7,200 banks. Those are pretty good odds.
- When banks do fail, most are insured. The FDIC insures deposits in several “ownership categories,” which means you may actually be insured beyond the $100,000 limit you hear about. For example, single accounts in your name are covered up to $100,000 per bank. Joint accounts are a separate category and also get their own $100,000 of coverage per person per bank. This means that a joint account held by you and your spouse is insured up to $200,000. Retirement accounts (IRS, SEP, etc.) are covered up to $250,000. Check out the FDIC’s tool to help you determine if your account is fully insured.
- Even if your bank fails, your account isn’t going to disappear. For example, in the case of Washington Mutual, the bank was sold to JPMorgan Chase. JPMorgan has already informed Washington Mutual customers to continue banking as usual. Within a few weeks customers will get new debit or credit cards, checks, etc. In the meantime however, your account number stays the same, your checks will still be honored and you will hardly know your bank failed at all.
- Although mutual funds are not covered by FDIC insurance does not mean you would lose the money you have in mutual funds that you bought through the bank if that bank failed. Mutual fund assets are not part of the bank’s assets – they’re held in separate accounts – so they don’t even come into play when calculating the bank’s assets and liabilities.
- Money-market accounts are considered bank deposits and are therefore insured by the FDIC. However, money-market funds are not considered deposits and are therefore not insured. Money-market funds fall in the mutual fund category and would be treated as such.
So although the recent news of bank collapses has occupied our thoughts lately, the chances of your own bank failing is actually very small. If it happens though, hopefully you’ll now be a little more prepared for what’s to come and can avoid panicking.