Bank Failures: How to Protect Your Money

After a tumultuous 2023 that saw some of the largest bank failures ever, the U.S. banking system appears to have stabilized. More bank failures are inevitable, however, and depositors could risk losing money any time one occurs. The first line of defense, FDIC insurance, has worked reliably to date. However, there are still a number of steps you can take to safeguard your assets from this worst-case scenario.

A financial advisor can help you build a financial plan that keeps your money safe and secure.

Risks Associated With Bank Deposits

A bank fails when regulators take control of the bank because it’s insolvent or at risk of insolvency. This isn’t an everyday occurrence. Five banks failed in 2023 out of more than 4,500 U.S. institutions and none failed in 2022 or 2021. However, in 2010, regulators closed 134 failed banks, according to data from the FDIC.

Failure can occur due to poor investment decisions by bank managers, tough economic conditions that cause a lot of borrowers to default and, sometimes, fraud. Sometimes suspicion about a bank’s troubles causes a bank run. This is when depositors withdraw their funds en masse. Bank runs can lead to bank failures when the institution finds itself without enough money to pay everyone.

The Federal Deposit Insurance Corporation (FDIC) protects depositors from losing money when these events take place. Banks fund the operation through fees, meaning depositors don’t have to pay separately or sign up for it. The process provides for paying depositors the full balances of covered accounts, up to certain limits, as soon as within a few days of a bank being closed by regulators. The National Credit Union Association (NCUA) similarly protects credit union depositors.

Not all deposits are insured, however. In fact, in the FDIC’s fourth-quarter 2024 report, it said more than 40%, or about $7 trillion, of the more than $17 trillion in deposits at U.S. institutions are not covered. Often that’s because account balances can exceed the FDIC insurance limit of $250,000.

While no one has lost money insured by the FDIC, deposits in excess of the limits are at risk if a bank fails. Let’s say you have a $350,000 savings account at a failed bank. In this case, you would receive $250,000 from the FDIC along with a certificate for a $100,000 claim. Then you’d receive payments to satisfy the claim as the bank’s assets are liquidated. This could take years and you might receive less than your claim if the asset sales can’t cover all the debts.

That’s a worst-case scenario and not necessarily how it usually plays out. In 2023, for instance, the FDIC agreed to pay depositors at failed banks the full amount of their balances even when they exceeded the coverage limits. In future, however, the agency might have to apply the rules more strictly. After all, the FDIC’s own financial reserves amount to only a tiny fraction of the approximately $10 trillion in deposits it insures.

The agency has other tools to protect depositors, including forcing mergers and requiring banks to follow sound practices. It can also borrow more money and has, ultimately, the backing of the Federal Reserve and the U.S. government.

What Happens When a Bank Fails

When a bank fails, regulators step in to take control. This usually happens on a Friday after business hours to avoid panic and allow for a smoother transition. The FDIC becomes the receiver and starts the process of either selling the bank to another institution or managing the closure.

If your money is within FDIC insurance limits, you will typically have access to those funds within a few business days. The FDIC may open a new account for you at another bank or send a check. You do not need to file a claim to get insured funds. However, if your deposits are over the insured limit, the FDIC gives you a certificate for the extra amount and works to recover it by selling the bank’s assets.

Getting back uninsured funds can take time and is not guaranteed. The amount you recover depends on how much the FDIC is able to collect from selling the failed bank’s loans, real estate, and other assets. This process can take months or even years. That’s why it’s important to keep your deposits within insured limits and spread your money across different account types or institutions if needed.

6 Ways to Keep Your Money Safe

Here are some ways to protect yourself from a potential bank failure:

Bank at an Insured Institution

Look for the “FDIC” logo on the bank’s website or displayed in its lobby. You can also use the FDIC’s Bank Find Suite to see if your bank is an FDIC member.

Use Insured Accounts

The FDIC covers all traditional deposit accounts, like checking, savings, money market and certificates of deposits, as well as some retirement accounts like IRAs and self-directed 401(k)s. However, money invested in stocks, bonds, mutual funds, annuities and life insurance policies is not covered, even if you bought these investment products from the bank. If you want insurance, keep your money in a covered account type.

Use Different Account Categories

The $250,000 limit per depositor, per institution applies to each account category. Common ownership categories include single, joint and revocable trusts such as payment-on-death accounts and living trusts. This means a couple could set up a pair of $250,000 single-owner accounts, as well as a pair of $250,000 joint-owner accounts, for a total of $1 million in deposits covered by FDIC insurance.

Use Multiple Banks

Spreading your deposits across more than one FDIC-insured bank can increase your total insured coverage. Since the $250,000 limit applies per depositor, per institution, using multiple banks allows you to keep more money protected. This approach is especially useful for individuals or businesses holding large cash balances. It also adds flexibility — if one bank faces issues, you still have access to funds at another.

Watch Your Balances

Insurance only covers $250,000 per depositor, per institution for each account category. Your account balances may get beyond that due to earnings from interest, large deposits, an inheritance or other sources. Use the FDIC’s Electronic Deposit Insurance Estimator (EDIE) to see if your balances are within the limits.

Plan Ahead

You may keep some cash in a safe place in your home as a fail-safe. It can take days or weeks to receive an insurance payout as regulators arrange for a failed bank’s sale or liquidation and you are likely to have bills to pay in the meantime.

However, it may be riskier to withdraw a large amount of cash and keep it around your home than to leave it in an insured account. You also may not want to contribute to a bank run that can topple a bank that would otherwise survive and recover.

Bottom Line

While bank failures remain rare, they can still pose financial risks, especially for deposits above FDIC insurance limits. By banking at insured institutions, choosing covered account types, diversifying account ownership, using multiple banks, and monitoring balances, you can reduce your exposure. Planning ahead for short-term access to cash adds another layer of protection. These steps can help safeguard your savings and provide more stability if a bank ever closes its doors.

Financial Planning Tips

A financial advisor can help you with your financial plan, including how your banking choices can play a role in it. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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