Banks and credit unions are generally safe places to keep your money. By setting money aside for safekeeping, you can’t misplace it, and it won’t go up in flames if your house burns down. But “safe” can refer to a variety of different risks, and those risks change over time. Finding the safest banks and credit unions for your money is a matter of evaluating the potential risks, choosing which ones to accept or reject, and deciding how much work you’re willing to do to protect your money.
Backing from the U.S. government is one of the strongest protections available, and one that most people depend on. If your financial institution fails and your savings are covered, you won’t lose money.
For most people, federal deposit insurance is sufficient, and no complicated strategies are necessary for the average saver.
For banks, FDIC insurance is a government-backed program that insures deposits. Funds are covered up to $250,000 per depositor, per institution. It’s critical to verify that your bank is insured and to understand what happens with different types of accounts (such as joint accounts and retirement accounts)—especially if you have more than $250,000 in one bank.
For federally insured credit unions, which are just as safe as FDIC-insured banks, members can rely on NCUSIF insurance protection. Again, you need to ensure that your accounts are covered and that you’re below the maximum limits.
If your bank or credit union fails and your funds are insured, your money is safe. The federal government, with backing from the U.S. Treasury, can replace any money that the bank loses. The process is typically fast (within one business day), and many people never even notice that their bank failed—until the name changes to a successor bank. Still, there can be delays and inconveniences as a result of a bank failure.
If you have more than $250,000, it’s essential to spread those funds among different insured banks or among different account titles.
While government guarantees provide robust protection for your money, some people prefer to only work with the safest banks, even though they might have ample access to government-insured institutions. Those people might not want to take the risk of potential inconveniences, or they might have uninsured funds above and beyond the maximum limits.
Several private companies rate banks and assign a rating designed to help you figure out if the bank is safe. These services can be helpful, but things can change quickly (possibly faster than the rating services can keep up with), and you need to check up-to-date ratings regularly. For many people, repeated checkups are cumbersome, so be realistic about how likely you are to conduct ongoing monitoring, and put those checkups on your calendar.
BauerFinancial uses an easy-to-understand star system. The safest banks receive a 5-star rating. BauerFinancial includes ratings on credit unions, and you can search by typing in the name of your financial institution. A basic star rating is free, allowing you to see if an institution received five, four, or any other number of stars. Learn more at BauerFinancial.com.
VERIBANC provides lists of safe banks as well as the opportunity to research individual banks. Fees for a single bank report start at $5. Learn more at VERIBANC.com.
Rating services look at various sources of data to come up with a “grade,” but you might not see all of the work or assumptions behind that grade. If you want to take a hands-on approach, you can run your own calculations. Evaluate how strong your bank is, and look for signs of trouble.
The Texas Ratio, which looks at how likely bad loans are to drag the bank down, is a popular tool for evaluating banks. Banks invest the money you deposit, lending it out to other customers, or investing the money elsewhere. If those borrowers don’t repay (or other bad things happen), your bank may be in trouble.
The safest banks have a Texas Ratio well below 100% (or 1:1). They are better able to absorb losses on defaulted loans.
Too Big to Fail
Some people believe in the concept of “too big to fail.” In other words, they think that the safest banks are the largest banks with tentacles reaching into many parts of the economy. The idea is that governments will prop up these banks and prevent them from failing (because the fallout of a large institution failing would have severe consequences).
But you don’t necessarily need to work with large banks. To compete with the “too big to fail” banks, smaller banks have gotten creative. For example, the CDARS program allows CD investors to make large deposits (above FDIC limits) at a small institution and enjoy full FDIC coverage by spreading funds out among several banks.
Although the view is not necessarily mainstream, there are some who believe that smaller institutions (that are not too-big-to-fail) are the safest places to keep your money. The concern is that large financial institutions, such as global banks, take on significantly more risk than small community credit unions. If they were to fall on hard times, some fear that those institutions would take funds from your account to meet other obligations.
That occurrence is not likely, and there are other forms of “bail-ins” that banks can use before they dip into your personal account and seize your savings. That said, anything is possible, and we don’t know what we don’t know about the future. If you want to be especially cautious, it might (or might not) make sense to plan for these types of events.
If you’re concerned about a robbery, be aware that most robberies go unnoticed by the majority of customers. Even bank employees might not know about a robbery in progress until after the event ends. Plus, theft is increasingly moving online, and you are often protected from errors and fraud—as long as you report problems quickly.
If you ever are involved in a robbery, don’t try to be a hero. Banks can insure against funds lost in a robbery.
Stay calm, try to notice details about the robber (without staring or drawing attention to yourself), and avoid influencing others’ thoughts on what they did or didn’t see. Discuss your own observations with law enforcement officials before you discuss the event with others.
Feel free to ask any bank you’re thinking of working with what kind of coverage is in place before you open an account.