How to tell if your bank is safe

Times have been tough, to say the least, with the rise of inflation and interest rates causing the prices of everything to skyrocket. If money has been consuming your thoughts, you're not alone.

With their steel vaults and impenetrable security, banks have been viewed as a safe place to keep your money locked up tight. But when it seems like everyone is struggling financially, it can be hard not to wonder, "Should I take my money out of the bank?".

Banks can face financial trouble just like anyone else. If you're unsure how to tell if your bank is about to fall off the deep end, you've come to the right place. Keep reading to learn how to tell if your bank is safe—and how to keep your money out of harm's way.

Is my money safe in the bank?

If there's any question you want answered when depositing money into an account, it's "how safe is my bank?" When entering your bank's branch, look for a sign either at the front door or a teller window with the FDIC logo. If you're able to spot this, you're in luck.

The FDIC, or Federal Deposit Insurance Corporation, is an independent agency created by Congress to protect your money. The agency does this by providing deposit insurance that covers up to $250,000 per depositor, per account ownership category, per insured bank.

Let's say you have $300,000 you're hoping to keep at a bank. To ensure none of that money gets lost if a bank fails, the safest option is to separate it into multiple bank accounts with balances under $250,000 each. You can even deposit it across multiple FDIC-insured banks for extra protection.

Keep in mind that most banks do have FDIC insurance, but it's not a requirement. For credit unions, the National Credit Union Share Insurance Fund (NCUSIF) provided by the National Credit Union Administration (NCUA) offers the same protections. Check that your bank is insured by one of these entities before trusting it with your hard-earned money.

What investments are covered?

FDIC insurance covers a wide variety of accounts, including:

• Checking accounts

• Savings accounts

• Certificates of deposit (CDs)

• Money market accounts

• Money orders, cashier's checks, and other official bank-issued items

• Negotiable order of withdrawal (NOW) accounts

To qualify for FDIC protection, you have to put your money in an account that's considered a deposit product. This means there are a few investments that aren't covered by FDIC insurance, including:

• Bonds

• Stocks

• Mutual funds

• Life insurance policies

• Annuities

• Crypto assets

• Safe deposit boxes

• Municipal securities

• U.S. Treasury bonds, notes, or bills (these are covered by the U.S. government instead)

Red flags your bank could be in trouble

Healthy relationships are important, especially when your financial well-being is at stake. If you're concerned about whether your funds are safe at your local bank, there are several red flags that may indicate trouble is brewing:

• Multiple branches have been shut down.

• Financial reporting is delayed or shows a poor outlook.

• Extreme cost-cutting measures have been taken, such as massive staff layoffs.

• Certain transaction activities have been restricted or discontinued.

• Fees have significantly increased.

• Incentives, such as fee-free accounts, have been eliminated.

Any move a bank makes to conserve cash is a clear sign it may be struggling financially. For example, if your request to withdraw money from your account or take out a cash advance can't be approved, you may want to prepare for the worst.

Using aggressive marketing techniques to draw in more customers (and more money) can also be a sign of trouble. It's normal for banks to market their products to attract new business. However, it becomes a red flag when the bank starts accepting anyone as a client or uses various paid non-banking sources.

These actions show a bank is simply trying to beef up its balance sheets as quickly as possible and isn't worried about regulatory issues. Failure to follow certain laws can damage a bank's reputation and cause a whole lot of legal trouble, which could then indicate bad news for your money.

Your best bet is to keep a close eye on your bank's quarterly or annual reports and what actions it's taking to stay open. If it's trying too hard to stay afloat, it may be time to end that relationship.

What happens when a bank fails?

The FDIC will normally swoop in and save the day when a bank fails. There are two actions the FDIC may take:

• Purchase and assumption transaction.

  Ideally, the FDIC will find a safe bank to pick up the slack from the failed bank. This means customers of the failed bank become depositors of the safe bank, and your money stays intact.

• Deposit payoff.

  If no safe banks are willing or able to claim a failed bank's deposits, the FDIC will pay out funds to each depositor up to the insured balance of $250,000 per depositor, per account ownership category. You can expect to receive your money just a few days after a bank closes.

However, the FDIC isn't completely indestructible, and the agency has its own limits. If numerous banks fail at once, the FDIC may not be able to cover every one.

The funds it uses to cover deposits are generated by insurance payments made by banks, and this total is often far less than the sum of the actual deposits. For example, as of 2022, the FDIC has over $128 billion in its insurance fund but over $10 trillion worth of insured deposits.

Despite this mega difference, the funds are usually enough to ensure everyone gets paid their full account balance. FDIC insurance is also backed by the U.S. government, which becomes the financial savior if the FDIC gets too overwhelmed.

Limitations of deposit insurance

Banks don't fail overnight. In most cases, you'll start seeing warning signs months or even years before a bank goes under. You already know FDIC insurance covers a certain amount of your money, but it can take a few days to actually receive those funds.

If your bank is under investigation or facing legal trouble, it may freeze all customer accounts. This freeze can last for days, weeks, or even years, whether the bank has deposit insurance or not. If this is your only bank and you have upcoming bills or other expenses to pay for, this seriously complicates things.

You may be forced to use a credit card to pay for bills, which can come with hefty interest fees. If you already have an existing credit card or loan payment, but your account is frozen, you're left stranded with no way to access those funds and make those payments. This can rack up penalty fees and cause damage to your credit score.

However, you can avoid this financial avalanche by doing research before depositing your money in a bank.

Signs of a safe bank

FDIC-insured banks are a pretty safe place to stash your cash. In fact, less than 1% of FDIC-insured banks have failed annually over the past decade, according to an analysis of FDIC data. There are certain risks to keeping your cash at home, such as theft or loss due to a fire or flood that homeowners or renters insurance may not cover. Depositing cash into a bank account eliminates those worries, so you can concentrate on more important things, like bulking up your savings or building good credit.

Knowing how to spot the signs of a financially secure bank is still a useful skill to have. Here are a few things to look for to ensure your money is in good hands.

Make sure your bank is insured

This has already been discussed, but it's important enough to mention one more time. Only deposit your money into FDIC-insured banks or NCUA-insured credit unions. You won't have to apply for this insurance because it's automatically given to you when you open an account.

There are several ways to determine whether a bank is FDIC insured. Look for the FDIC logo on the bank’s website or on a sign on the bank's premises. You can also call the bank or the FDIC directly, or search for your bank in the FDIC BankFind directory.

Keep your funds under the limit

The idea of juggling multiple accounts may not be appealing, but your wallet will be thankful for it if your bank does fail. Funds are capped at $250,000 per depositor, per account ownership category, and per insured bank. Double-check that your money is invested in accounts that qualify for FDIC protection to avoid any unpleasant surprises.

Opening accounts at multiple banks is one of the safest options. The likelihood of more than one bank folding simultaneously is slim, and knowing your money is secure and insured may help you sleep better at night.

Check your bank's assets

A bank's balance sheet contains valuable information on its assets, including loans, bonds, stocks, or real estate. It also reveals how much of the bank's deposits are covered by FDIC insurance. Believe it or not, these balance sheets are public information.

Through the FDIC BankFind directory, you can generate a financial report for your bank and find a whole lot of other useful information, such as:

• Number of operating branches

• When the bank opened

• Where the bank is legally headquartered

• Important changes throughout the bank's history

The financial report will list your bank's total assets and liabilities, giving you a good idea of whether your bank is engaging in any risky behaviors.

Follow the news

Keeping tabs on any mention of your bank in the news can help you stay informed on what the company has been doing. If you see any updates about your bank being sold or acquired by another institution, this may be a sign of financial distress.

It's also worth noting if your bank loses a reputable correspondent relationship with another well-known bank or routinely changes correspondent relationships. If other institutions don't want to associate with your bank, this could indicate something fishy is going on.

You wouldn't leave your money with a person you don't trust, and it's important to have that same attitude when choosing a bank.

Key takeaways

That wraps up today's lesson on bank safety. The idea of your bank failing and freezing your money is a scary thought, but remember, this is the worst-case scenario. There's no need to run to the nearest branch and withdraw your life's savings.

Most banks don't fail and are covered by FDIC insurance that protects their customers. If you keep tabs on what your bank is doing and maintain an account limit of under $250,000, your money is safe exactly where it is.

Varo is a member of the FDIC, meaning your cash will stay safe up to the insured limits even if we struggle. Open an account today and breathe easier knowing your money is in good hands.