Most banks could not handle a run if every customer demanded their deposits back simply because banks don’t keep everyone’s cash in the big safe in the back. Banks lend money on longer terms and at higher interest rates than they pay on their deposits. To backstop their liability and make sure they can provide cash when depositors need it, banks purchase bonds, which could be sold. Ideally every bank has enough assets to offset their liabilities.
You likely remember during the 2008 financial crisis that banks were subject to stress tests and were required to build up their capital reserves. Banks fail when assets fall below their liabilities. Such news prompts investors to withdraw their cash, which can quickly turn into a run on the bank. This is when the Federal Deposit Insurance Corporation (FDIC) steps in.
The FDIC is an independent government agency that maintains stability and public confidence in our nation’s banking system. In fact, no depositor has lost any insured funds as a result of a bank failure since FDIC insurance began in 1934.
Depositors are insured up to $250,000, per FDIC-insured bank, per ownership category. When a bank fails, the FDIC ensures the average customer will still receive their money—no need to jump out of windows like bankers reportedly did in the Great Depression. In extreme instances, like we recently saw with Silicon Valley Bank, the FDIC bailed out depositors beyond the $250,000 limit. This was not done out of the goodness of their heart—venture capitalists, startup companies, and many businesses would be unable to operate or make payroll, which could have led to a much bigger systemic problem.
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