Are ‘Too Big To Fail’ Banks Really the Safest Place For Your Money?

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For the second time in the past 15 years, people are talking about banks that are “too big to fail.” It happened in 2008 during that year’s banking crisis, and it’s happening again in 2023 with another banking crisis.

This year’s version started with the recent collapses of Silicon Valley Bank and Signature Bank and has continued through massive problems facing First Republic Bank, Credit Suisse and others. These events have renewed conversations about the safest places to keep your money.

Conventional wisdom holds that big banks are the safest because the U.S. government will step in to save them before they can collapse. That’s what happened in 2008, when the U.S. Treasury poured hundreds of billions of dollars into purchasing failing bank assets.

The biggest chunks of money — at least $10 billion each — went to big banks such as Wells Fargo, Bank of America, Citigroup, JPMorgan Chase, Morgan Stanley and Goldman Sachs. The reasoning then was that letting big banks fail would expose too many depositors, investors and businesses to financial losses. Not only that, but letting them fail would create panic or financial instability because so many big banks are connected to other financial institutions, Axios reported.

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That same reasoning seems to apply today — at least judging by recent trends. As Bloomberg reported, the failure of SVB and other banks has led to a rush of depositors moving billions of dollars to JPMorgan Chase, BofA, Citigroup and Wells Fargo.

“The top six banks in the U.S. are and have been too big to fail [and] the financial crisis over 10 years ago demonstrated that,” Michael Imerman, an assistant professor at the University of California Irvine’s business school, told Bloomberg. “So it’s safer to go with a name with higher degree of certainty.”

Big Banks Not Necessarily Safer Than Smaller Institutions, Credit Unions

But for most customers, big banks are not necessarily any “safer” than other federally insured financial institutions. This is mainly because most bank deposits are protected by the Federal Deposit Insurance Corporation (FDIC), which insures up to $250,000 per depositor (joint accounts are insured up to $500,000). Similar protections are available at credit unions, where the National Credit Union Share Insurance Fund (NCUSIF) insures up to $250,000 per depositor.

Since the vast majority of Americans don’t have anywhere near $250,000 in their accounts, their money is safe in any FDIC-insured bank or NCUSIF-insured credit union. Even if a financial institution fails, the FDIC or NCUSIF will make sure you get your money. That’s what happened as SVB, which was taken over by the FDIC following its collapse.

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“Every American should know that their accounts are safe and their deposits are protected,” Jeff Sigmund, a spokesperson for the American Bankers Association, told USA Today. “Our industry will work with the administration, regulators, and Congress to further bolster that trust.”

Things get trickier for bank customers with more than $250,000 in their accounts, although the FDIC has taken steps in the past to insure accounts beyond that amount. The $250,000 figure is the minimum that can be insured, but not necessarily the maximum.

Even so, bank customers with more than $250,000 to put into bank accounts are advised to take extra steps to protect their money. For example, you could spread it around between different financial institutions. Or, you could reroute some of your funds into the Certificate of Deposit Account Registry Service (CDARS), which represents a network of banks that insure millions for CD savers, Forbes reported.

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