How to know if you should keep your money in a bank if you're worried about a recession (2024)

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• Banking regulation has changed over the last 100 years to provide more protection to consumers.
• You can keep money in a bank account during a recession and it will be safe through FDIC insurance.
• Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.

Recessions are a normal part of the business cycle. Nevertheless, they're still scary to think about. So if you start to hear economists talking about a possible incoming recession and you see headlines like Silicon Valley Bank being shut down by regulators, you might be wondering about the safety of your money.

If you're concerned about whether money is safe in a bank during a recession, there's good news — your money will be likely secure in a bank account. Here's what you need to know about banking during economic downturns.

Banking failures throughout history

We'll briefly go over two of the biggest economic crises in US history, so you can get a better idea of how policies have changed so consumers have more security over their deposits.

Bank failures during the Great Depression (1929 to 1939)

The Federal Deposit Insurance Corporation (FDIC) was established in 1933 in response to the bank failures that happened during the Great Depression.

"The crucial thing to recognize about the Great Depression and what's come after that is the kind of bank failures that we had prior to 1934 are very unlikely to occur again because the US created deposit insurance," adds Jeffrey Miron, a senior lecturer of economics and director of undergraduate studies at Harvard University.

Through the Banking Act of 1933, the FDIC could protect consumer bank accounts through deposit insurance.Miron says people's incentives changed after this new policy was created.

"If you believe the federal government's promise, then you don't have to worry that other people might be trying to get their money out first," says Miron.

Bank failures during the Great Recession (2007 to 2009)

Significantly fewer banks shut down during this period of economic downtown than during the Great Depression. According to the FDIC, approximately 500 bank failures occurred between 2008 and 2015. In comparison, about 4,000 banks failed in 1933 alone.

Since bank accounts were backed by FDIC insurance, the Great Recession didn't impact depositors in the same way the Great Depression did.

"Depositors today never lose a cent even beyond the deposits that are legally insured, and the reason is, when a bank gets into trouble, the FDIC basically looks for acquiring banks, and all the deposits are transferred to the acquiring banks. That happened in the 2008 crisis," says Charles Calomiris, aColumbia Business School professor in finances and economics.

Is money safe in a bank?

Money deposited into bank accounts will be safe as long as your financial institution is federally insured.

The FDIC and National Credit Union Administration (NCUA) oversee banks and credit unions respectively. These federal agencies also provide deposit insurance.

When a financial institution is federally insured, money deposited into a bank account will be secure even if the financial institution shuts down. Your money will not be lost. It is usually transferred to another bank with FDIC insurance, or you'll receive a check.

Savings accounts, checking accounts, money market accounts, and CDs are examples of federally insured bank accounts. Up to $250,000 is secure in individual bank accounts, and $250,000 is protected per owner in joint bank accounts.

Should you take money out of a bank before a recession?

If you're worried about keeping money in your bank account during a recession, you can rest assured that your money will likely be safe at a financial institution, and you won't need to take it out of your bank account.

"It's very unlikely for history to repeat itself," says Maggie Gomez, CFP® professional and owner ofMoney with Maggie. "I would still have trust in the banking system, especially over keeping your money in your house or someplace that is exposed to much more likely risks of loss."

Gomez suggests using two different banks if you're concerned about where to keep your money.

For example, Gomez says you could have your money deposited in an online bank and a brick-and-mortar bank. You'll be able to deposit or withdraw money at brick-and-mortar locations and earn interest on a high-yield bank account at an online bank.

Financial experts generally advise keeping three to six months' worth of expenses in a bank account as an emergency fund. How much you should keep in your account may also depend on whether you're saving up for a personal goal, like a down payment on a mortgage or a new car.