AARP Eye Center
Recessions don’t always follow bank collapses, but the recent failures of Silicon Valley Bank and Signature Bank have pushed recession fears up a few notches. For retirees, this means added worry about the safety of their money. With that in mind, let’s take some time and review the financial safety nets you have — and those you may not.
Before the creation of the Federal Deposit Insurance Corporation (FDIC) in 1933, depositors often got back only pennies on the dollar — if that — when a bank failed. Today the FDIC insures most bank deposits up to $250,000. If you have more than $250,000, you can get the additional funds covered by opening an account at a different bank, or by opening a different type of account, such as an individual retirement account (IRA), at the same bank. You can find out how much of your deposits are insured through the FDIC’s Electronic Deposit Insurance Estimator.
AARP Membership — $12 for your first year when you sign up for Automatic Renewal
Get instant access to members-only products and hundreds of discounts, a free second membership, and a subscription to AARP The Magazine.
The banking industry funds the FDIC via insurance premiums, which go into the Deposit Insurance Fund (DIF), whose assets are equal to about 1.3 percent of insured deposits. The FDIC also has a $100 billion line of credit with the U.S. Treasury in case losses exceed the DIF’s assets.
Of course, banks aren’t the only financial institutions in the world. Here are some answers to common questions about the protections you have — or don’t — in case of financial disasters.
How shaky is the banking sector? It’s always a bit hard to tell: Banks can carry bad loans on their books for months before selling them off, and it takes a while for good loans to go bad in the first place. A spate of bad loans may not show up in a bank’s earnings until well after they have gone bad.
Rising interest rates can be harmful to bank earnings. Silicon Valley Bank had a large portfolio of mortgage-backed securities with very low yields. As the Federal Reserve pushed interest rates up, those securities lost value. And as depositors demanded their money back, the bank had to sell those securities at a loss.
Wall Street has slashed the stock prices of many regional banks. In the past 30 days, financial stocks have fallen about 12 percent and regional bank stocks have tumbled 31 percent through March 14, according to Morningstar, the Chicago investment trackers.
At least so far, the banks’ problems seem fairly limited. The Federal Reserve Bank of New York noted in November that the banking system is well capitalized, meaning that most banks have enough reserves to weather a downturn. S&P Global Ratings noted that it has “not seen evidence that unmanageable deposit outflows experienced at a few banks have widely spread across rated banks.”