When Banks Go Bust: How Depositor Insurance Protects Your Savings

In this article, we talked about how banks work and why they can fail. Not an appealing prospect. But what would happen when they do? Is our money safe?

Too big to fail

A famous phrase from the past. The system, the banks, were too big to fail. But, of course, those around in 2007-2009 will know this wasn’t quite the case. (Or those of you who’ve watched The Big Short and Margin Call, two excellent movies on this subject!) will know.

Recently, we’ve heard about banks failing (Silicon Valley Bank and Signature Bank) too.

What does a bank's failing mean for its clients?

Guarantees, insurance, protection

The United States: FDIC

As most of this is happening overseas in the good old U.S. of A., we’ll start there.

In the U.S., there is something called the Federal Deposit Insurance Corporation, also known as the FDIC. Created in 1933 (after the Great Depression), it aims to protect depositors and ensure the banking system is stable.

As the name suggests, it is insurance for when banks fail. Each U.S. bank pays a monthly premium into this insurance (they are obligated to do so). When a U.S. bank fails, the FDIC pays up to $250,000 per depositor, per insured bank, for each account ownership category.

This only applies to actual “cash in the bank”: investments such as stocks, bonds, mutual funds, foreign bank deposits and credit unions are not covered.

For most of us, $250,000 per person is plenty of insurance. If you do have more, consider spreading your deposits over multiple banks 😉. But at that point, you’d probably have a financial advisor who hopefully advises you the same. Or, you know, to not hold such a significant position in cash. But that’s another discussion.

In Europe

Writing about Europe is always a bit harder, as we have many countries to deal with. But the principle is often (but not always) similar to what’s in place in the U.S.

Here in The Netherlands, we have the ‘Deposito Garantie’ offered by the National Bank (DNB). Your savings are protected up to €100,000 per person, per bank, for any Dutch bank. This is true for both individuals and corporations.

In all of the EU, this same principle applies. Deposit guarantee schemes (DGS) are mandatory for every bank in the EU and also protect up to €100,000 per person per bank in case of failure. It's important to know that this insurance is also paid for by the banks themselves, not the tax payer.

Knowing that we can rest easy. Our money in our bank accounts is safe (from a failing bank, not from inflation, mind you 😉).

If you have more than €100,000 in savings, you should spread it over multiple banks. And maybe invest some of it?

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