Can Banks Take Your Money in a Depression?


Published: September 13, 2022

can banks take money in depression

Economic downturns leave everyone panicking. Suddenly gas costs twice as much, your bills skyrocket, and food is three times what it cost two weeks ago. You need to depend on your hard-earned savings now more than ever, but will they always be safe in a bank?

In today’s digital world, most people keep their money in banks or credit unions to prevent theft and the headaches of storing cash. However, as inflation and the cost of goods continue to rise, many people are beginning to wonder if the banks can take your money in a depression. Keep reading to find out what risks you could be facing.

The FDIC in the United States

The U.S. Federal Deposit Insurance Corporation (FDIC) began during the Great Depression to insure depositors’ funds. The FDIC is a semi-private insurance organization established under The Banking Act of 1933 following the devastating 1929 stock market crash. Millions of Americans lost their bank funds as over 9,000 banks failed, and a total of $140 billion was lost.

This event only worsened Americans’ already poor economic state, making it clear that the United States needed a better system in the future to prevent such an enormous loss of funds again.

While the banking experience today offers incredible convenience, such as easy ways to deposit checks, view your credit score, or access mobile banking transactions, none of this matters without insurance. That’s where the FDIC steps in.

If an insured bank failed today, the FDIC would sell it to a healthy company or reimburse depositors. Either way, you won’t lose your money, regardless of your bank’s status.

If a new institution purchases your bank, you’ll receive a notice in the mail. If the FDIC cannot find an organization to buy it, you’ll need to place your reimbursed funds elsewhere.

What Is Insured by the FDIC?

Not all banks have FDIC insurance, though most major banking organizations do. Some smaller credit unions or private banks use similar insurers that offer the same policies.

Always check if your bank carries FDIC coverage or something similar. We recommend changing banks if your current one doesn’t have insurance, as you could lose your funds if the organization fails.

For banks that do have insurance, the FDIC covers the following products:

  • Checking accounts
  • Savings accounts
  • Money market accounts
  • Certificate of deposit

Insurance Limitations

The insurance organization limits the amount of reimbursement you receive. The FDIC categorizes ownerships into the following categories:

  • Individual account owners
  • Joint or shared funds with multiple owners
  • Individual retirement accounts (with funds held on deposit)
  • Business accounts
  • Revocable or irrevocable trust accounts
  • Employee benefit accounts

You may receive a maximum of $250,000 in coverage per ownership category above for each of your separate banking relationships. For example, if you have an individual account with two banks and a shared account with one, you would have a total of $750,000 in coverage. If you have multiple checking or savings accounts under individual ownership, you’ll still only have $250,000 across them all.

We recommend spreading your funds across multiple institutions or ownership categories if you deposit more than this limited amount. Otherwise, you might lose money if your bank fails.

Non-guaranteed Assets

The FDIC won’t cover investment products, like bonds, even if they’re relatively secure. The most commonly used banking products that don’t have FDIC insurance include:

  • Stocks
  • Exchange-traded funds (EFTs)
  • Government and corporate bonds
  • Life insurance policies
  • Safe deposit boxes carrying any valuables, including cash, jewelry, bond certificates, etc.

Consider the performance risks of each of these investments when securing your finances. For example, U.S. Treasury bonds offer low risks, while stocks, EFTs, and mutual funds tend to suffer financial losses during economic recessions. Transferring your investments to safer vehicles during downturns could protect your financial future.

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Is Your Money Safe in a Credit Union?

While they might not be as secure as traditional banks, credit unions still secure your funds. Rather than using FDIC insurance, credit unions use National Credit Union Administration (NCUA) coverage. The NCUA offers the same maximum of $250,000 in coverage per ownership type, with the same parameters.

Overall, your money should be just as safe in a credit union as in a bank, though it’s important to consider the effectiveness of NCUA coverage versus FDIC. The FDIC is a much more extensive network with more robust safety nets. If you feel concerned, consider moving to a bank.

Credit Union Coverage Limitations

Credit union insurance limits the same products as the FDIC. The NCUA won’t insure:

  • Stocks
  • Bonds
  • Mutual funds

Investing your money is always a risk, regardless of how confident you feel in the organization, which is why most insurers won’t cover it. We recommend conducting adequate research before spending your hard-earned cash on uninsured avenues.

Is It Wise To Withdraw Your Money During a Recession?

It isn’t wise to withdraw your money during a recession. When people panic and take out their cash, it increases the chances of their bank failing, ultimately worsening the economy. The FDIC and NCUA protect your funds to prevent this scenario.

Instead, we recommend leaving your money where it’s safe and doing your best to add extra savings into your accounts. You would need more cushion money during a recession, so keeping larger portions of your paycheck aside whenever possible is crucial. Rainy day funds can help you scrape by if you lose your job and need extra financial support.

Be sure to continue paying off any debts or credit cards during recessions. Credit doesn’t magically disappear when the economy’s terrible, so you don’t want to ruin your score by missing payments.

You can also consider investing any extra funds. Investing during a recession is usually riskier, though it can help you combat the excessive inflation rates, protecting the value of your savings. We recommend selecting an investment opportunity with solid appreciation rates, like gold or real estate.

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Introduction of The Dodd-Frank Act in 2010

After the 2008 economic crisis, the Obama administration passed The Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. The new financial legislation introduces the concept of “bail-ins,” which protect large organizations from failing. If you hold your money in a checking or savings account with a bank that stimulates the economy and is “too big to fail,” the government might freeze your funds and use them to save the organization if it crashes.

Funds Beyond the FDIC Protection

In the scenario above, the bank would use your funds to stabilize itself rather than the government. The FDIC can only help you if it has enough funds to pay your loss.

The FDIC currently has access to funds in the billion-dollar range. To put it into perspective, many major banks typically hold multiple trillions in depositor funds. The FDIC would be unable to pay all the losses if a large bank fails.

How To Recession-Proof Your Assets

While you can’t necessarily “recession-proof” your funds, you can take proactive steps to protect your earnings from economic downturns. We recommend practicing the following cautionary tactics to keep your financial status safe.

Pay Off Debt

Your credit score determines your ability to get a loan, buy a car, purchase a house, or open new credit cards. Poor credit scores make it hard to function during a recession, especially if you’re low on cash or just lost your job.

We recommend keeping an eye on your credit score and doing whatever you can to boost it. Usually, you can improve your credit by making monthly payments toward your debt and disputing any inaccuracies.

Don’t Overspend

Spending money is easy, especially when you have mouths to feed and bills to pay. Unfortunately, you must become more frugal during recessions. You might want to switch to store brand products rather than name brand, skip the pricy restaurant bills, and reduce your expensive activities.

Have an Emergency Fund

Place all your extra saved money from above into your account as a cushion fund. Having rainy day savings is critical because you never know when you might lose a job or suffer a financial crisis. You might want to consider investing your savings as well.

As the economy worsens, inflation increases, causing a general rise in the price of goods. Extreme inflation rates cause your savings to become less valuable than they were before. You can combat inflation by investing your extra funds in appreciating assets.

While U.S. cash loses value, gold, real estate, and other appreciating assets continue becoming more valuable. Investing in such could allow you to make money during a recession rather than lose it.

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Keep Your Money Safe By Investing In Gold & Silver

If you’re interested in storing your money in something other than a bank, you may want to consider investing in precious metals like gold and silver.  Unlike cash, precious metals continue to appreciate over time, making sure that the value of your investment keeps up with inflation. In addition, you can store your precious metals at home or in a secure private depository instead of keeping them in a bank with federal oversight.

If you’re looking for something more than just an investment in physical precious metals, you might even consider investing in a gold and silver IRA. Gold and silver IRAs are tax-advantaged and offer secure investment opportunities to keep you on track toward your financial goals, even during a recession. At Noble Gold, we believe precious metals are the foundation for future financial success.

Contact us today at (877) 646-5347 to discuss your gold IRA options with our financial experts!

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