Savings and bank deposits – how safe are they?

The last few days have seen a raging debate going on in Washington over the US debt limits and its raise, which could possibly shock the entire financial system. Hence, this makes it the ideal time to check on your bank deposits as well as other savings accounts to ensure that the money that is stashed away is safe and well protected.

In case the lawmakers fail to raise the debt ceiling and if the US defaults on its debt, then you may have to start worrying about your deposits and savings – and their safety as well.

Greg McBride has stated that if the government defaults and if it is not a brief one, but something that drags on, then the financial markets would be in turmoil and the credit markets would simply seize.

In case the defaults get dragged on for months, then there would be one pertinent question on everyone’s mind – is the government which is backing the Federal Insurance on your savings and deposits, good for the cash?

The Federal Deposit Insurance Corporation normally collects fees from the banks in order to insure deposits, but claims that it has the backing and credit of the government.

McBride states that there would be no government backstop. The bank failures seem to have slowed down from 61 through July 30 this year whereas; it was 108 from January through July 31 last year. Debt defaults suggest an economy in turmoil and also perhaps a rise in bank failures. Hence, if the FDIC insurance funds were to get depleted, the scenario would become scary.

Fortunately, a drawn-out US debt default seems very unlikely, states McBride. Added to that, the doomsday scenario will have to be in effect for some time before people start worrying about deposit insurance, he added.

The other concern seems to be the credit rating agency downgrade of the US government debt. If you have invested, there is nothing to worry. In case there is a downgrade without default, the bank deposits is more likely to become a safe haven, especially for consumers, stated McBride. However, the only bad news is that the existing low interest rates on deposits will not improve in the near future at least.

Although the financial Armageddon scenario seems to be unlikely, it is important to ensure that your deposits are insured properly. According to the FDIC, for the 380 bank failures between January 2008 and July 22, 2011, around $218 million of the customer deposits remained uninsured.