Is it really safe to put my money in the bank?

From time to time some of my students mention that they are worried about the safety of banks and putting their money there. Below is a brief history lesson so you don’t need to be worried anymore.

Anyone listen to the news about what is going on with Greece's financial woes?  How about this: Does anyone remember the movie It’s a Wonderful Life? For those of you who don’t: it’s an old black and white Christmas movie about a really nice guy who gets to see how the world would be if he never existed. Remember how the “Building and Loan” George Bailey worked at ran out of money? That was an example of a bank run.

I am going to tell you a little about bank runs and explain why you don’t have to be worried about them in this country any more.  Let’s assume that 10 people deposit $1,000 each in a bank. Is $10,000 just sitting in the bank waiting to be taken back out? No, if that’s all a bank was, how would they pay for the building and the salary of the tellers and security?  Banks use the money you deposit to loan to people for interest and to invest in things that will make them income.  Because of this, there is never as much money in a bank as the depositors put in the bank all at one time. That is usually o.k. because the bank doesn’t expect everyone to come in at the same time to take out all of their money.  A bank run happens when there is some sort of panic in the population, and a lot of people pull their money out of the bank at the same time, and there isn’t enough left in the bank for everyone to get their money out all at once.  When people hear that there is or might be a bank run, they go and try to get their money out too before they think it will be all gone, and it snowballs into a self fulfilling prophecy.  The weather man predicting that it will rain doesn’t make rain more likely. A financial reporter predicting that there will be a bank run, does make it more likely.

Bank Runs are one of the big causes of the Great Depression in the 1920s and 1930s.

Fortunately, we have learned a lot since then.

There are now government bailouts for banks in the US.  There is also government supervision and regulation of banks in the US.  Our government created Central Banks now that will lend money to smaller banks if they need it.  After a bank run starts, there is now a law that can create a temporary freeze of withdrawals to give people time to calm down, and to give the central banks time to lend the local banks money.  We are now just coming out of “the great recession”, which was the closest thing to the great depression since then. The big government bailout of banks that happened recently that you all can remember hearing about in the news was just one of the ways that the government prevented the emptying out of banks from bank runs, as happened in the great depression.  If a bank run were to happen today, we are also protected by the FDIC.  The Federal Deposit Insurance Corporation (FDIC) was created in 1933 right after the great depression by the Federal Government.  It provides deposit insurance guaranteeing the safety of your money in the bank up to $250,000 for each and every deposit account in each insured bank.

The FDIC does not provide deposit insurance for Credit Unions. Most Credit Unions are insured by the National Credit Union Administration (NCUA).  How do I know if my credit union is one of the ones that has insurance for up to $250,000 per each deposit account? They are required to have a big sign that says “deposits are backed by the full faith and credit of the United States Government.”  Since the start of FDIC insurance on January 1, 1934, no depositor in the US has lost any insured funds as a result of a failure or bank run.