If you're worried about banking collapses, there are steps you can take to protect your money and ensure its future - such as making sure your bank is FDIC insured or not making excessive deposits.
The FDIC provides protection to consumers through checking, savings and money market accounts through their FDIC coverage in case of bank failure - however, there’s a lot more you should know about, so let’s get into it.
At times of economic uncertainty, it can be hard to put your faith in banks. Luckily, most banks are insured by the FDIC which can protect deposits up to $250,000 should a bank fail.
While it's good to know your bank's financial health and be prepared in case of its collapse, panicking should never be allowed to set in. Douglas Adams said it best: "Panic is the quickest way to destroy an original thought."
Banking panics typically arise when depositors at one bank notice that others are exiting it due to its shrinking assets due to insolvency.
Bank runs are events whereby all the cash in a bank's vault is quickly depleted, forcing it to seek short-term funding solutions in order to continue operations and pay its depositors on time, creating panic among its depositors and staff alike.
Historically, bank runs were countered through deposit insurance and guarantees (https://www.pewresearch.org/fact-tank/2023/04/11/most-u-s-bank-failures-have-come-in-a-few-big-waves/). But this approach may no longer suffice in today's environment of increased volatility: with banks now facing risks beyond customer deposits - such as wholesale funding (money tapped from banks outside traditional customer deposits) and shadow banking (loosely regulated financial firms like hedge funds)
Governments have also needed a comprehensive risk regulation scheme in order to minimize panics caused by such forms of risk-taking, so it’s not just limited to the private sector anymore.
Research Your Bank's Solvency
The Federal Deposit Insurance Corporation (FDIC) insures most deposits held at banks approved for FDIC coverage. This serves as a safety net that prevents bank runs while still allowing customers to use their accounts; however, its coverage cannot exceed certain levels.
Find out if your bank is solvent and insured by reviewing its financial ratios, available in its annual report or on the FDIC website. These ratios indicate how the bank stacks up compared with its peers.
If your ratios or deposits begin to deteriorate or you observe a decline, this should raise red flags. These could be signs that indicate trouble at a bank that will impact both you and other customers negatively.
As part of a bank's overall assessment, it's wise to review their available capital - an estimate of how much liquid assets it has on hand that should cover any potential losses that might arise - that are considered Tier One capital.
As well as capital, you should also examine a bank's loans and investments closely. If there are too many non-performing loans in its portfolio, that should raise red flags for you.
One crucial consideration in selecting a bank is their ability to pay its creditors on time. Failure to do so could put them on the path toward failure and threaten their viability as businesses, so much so that the entire stock market could be affected by less than a handful of decisions.
Ensure Your Bank Is Insured
If you hold deposits at a bank, it's essential that they are protected by the Federal Deposit Insurance Corporation (FDIC). Established during the Great Depression to provide insurance against losses in deposits, this agency now insures over $9 trillion worth of deposits!
If a bank fails, the FDIC will usually sell it off to another healthy institution while providing insurance funds back to depositors. This process usually runs smoothly and usually only requires several days for completion.
Before opening a checking or savings account at any new bank, make sure that it's insured with the FDIC by visiting their website or calling their customer service line. It should be simple enough to quickly ascertain whether your bank has this protection.
The FDIC provides a Bank Find tool on its website that allows users to easily check the insurance status of any financial institution, from credit unions and online-only banks, all the way down to local branch locations. If you plan on depositing large sums of money at once, consider opening multiple accounts across various banks so as to be certain your funds are fully protected.
According to this article, banks should also obtain commercial property and general liability policies to safeguard physical assets like buildings, offices, security systems and computers from being damaged, stolen or destroyed by acts of damage, theft or vandalism.
Other specialized policies available for banks to purchase include management liability, fiduciary liability and cyber liability policies - with kidnap and ransom coverage providing added peace of mind against robbers stealing customer funds for ransom or otherwise committing illegal acts against their accounts.
Don't Exceed the FDIC Limit
When it comes to your savings, it is important not to exceed the FDIC Limit. This federal insurance policy ensures your funds will still be accessible in case of bank failure.
The FDIC was established in 1933 following widespread bank runs during the Great Depression, in order to foster public confidence in financial systems by insuring deposits at banks, savings associations and credit unions up to $250,000 per account holder and up to $500,000 for retirement accounts insured by them.
In the event of bank failure, the FDIC is charged with collecting and selling off the assets belonging to the failed institution; returning any deposits; and settling any outstanding debts with creditors. Furthermore, they may impose capital, investment and oversight requirements designed to minimize future bank failures.
Note, however, that the FDIC doesn't insure investments like stocks and bonds; instead, there is another agency known as Securities Investor Protection Corporation (SIPC) which protects your money should your brokerage firm fail.
FDIC deposit insurance limits vary; usually between $250,000 per person, bank account and ownership category (how you own them). But that may not be the maximum coverage available depending on certain qualifications - opening multiple bank accounts or using different ownership categories may provide more coverage than expected.
Consult a Financial Advisor
One of the best ways to protect your money in the wake of a banking collapse is consulting a financial advisor. These professionals can assist with retirement planning, stock investing strategies, creating an emergency fund and more - they have access to all necessary information as well as being up-to-date on trends within the finance industry.
An experienced financial advisor will be able to assess your current situation and offer impartial financial planning. Companies like Bonds Online have investment strategies that will help prevent mistakes while at the same time help you understand any associated risks with investing your money. This is extremely beneficial for anyone new to the game.
No matter your financial standing or life situation, making sound financial decisions is paramount to reaching your dreams. A financial advisor can assist in managing and organizing your finances to achieve this end.
An advisor can not only help create and implement your plan, but can also oversee its management on an ongoing basis - this is extremely valuable as markets can suddenly shift at any moment.
Finding a qualified financial advisor is easy if you ask friends and family members for referrals or search online databases. Compare fee structures until you find one that best meets your budget needs; and ensure the advisor is registered with a provincial securities commission so they are acting in your best interest.
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