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How Safe Is Your Money At Your Bank?

A very important benefit of banks and credit unions is safety. When we deposit our money into a bank account, we can feel confident that the money is safe. We can get higher returns in stocks, bonds and other investments, but they have risk. Bank accounts should be essentially risk free, but how risk free is our money in a bank account? Is there any chance that some or all of our money could disappear?

This is the first of a series of articles in which I’ll review this issue of safety.

Safety of Your Money When Your Bank Fails

The first potential risk is the soundness of the bank or credit union. If the institution goes bankrupt, will our money disappear? Most DA readers should know that we’re protected by federal deposit insurance. The FDIC covers bank accounts and the NCUA covers credit union accounts. The two things depositors need to ensure is that their bank or credit union is federally insured and that their deposits remain under the coverage limits. How can you be sure your bank or credit union is federally insured? And how to ensure your deposits are under the coverage limits? I"ll cover these questions in the second article.

Safety of Your Money When There’s Employee Theft

It’s important to understand that the FDIC and NCUA deposit insurance only takes effect when the institution fails. Another risk is loss of your money due to employee theft. Here’s what the FDIC says about deposit insurance and theft:

situations not insured by the FDIC

Robberies and Other Thefts - Stolen funds may be covered by what's called a banker's blanket bond, which is a multi-purpose insurance policy a bank purchases to protect itself from fire, flood, earthquake, robbery, defalcation, embezzlement and other causes of disappearing funds. In any event, an occurrence such as a fire or bank robbery may result in a loss to the bank but should not result in a loss to the bank's customers.

As described above, a bank could be hit by theft, but "a loss to the bank should not result in a loss to the bank’s customers." The words "should not" suggest that cases could arise in which a bank customer may experience a loss. In fact, a case did occur in which customers had to file a lawsuit against a bank to get back their deposits. I’ll review this case and this theft risk in the third article.

Safety of Your Money When There’s Electronic Fraud

Electronic fraud has become more of a concern due to all of the banks that have been hit by hack attacks. Most of those attacks haven’t directly affected customer bank accounts, but these incidents show that sophisticated hackers are out there looking for ways to break in and steal money. Regulations exist that protect customers. In the fourth article I"ll review this regulation and describe what bank customers must do to be protected.

Safety of Your Money for Business Accounts

This issue of electronic fraud is even a more serious issue for businesses than for consumers since there are fewer regulations that protect businesses. There have been several cases in which businesses have filed lawsuits against banks in an attempt to get back money that was lost in electronic fraud. I’ll review these cases and the risk that businesses face in the fifth article.

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  |     |   Comment #1
I'm looking forward to this series. It ought to be real interesting.
  |     |   Comment #2
Excellent topic. Thanks for covering this important area in depth.
  |     |   Comment #3
Ken this is excellent stuff.  Thank you so much for thinking of this!

Your reminder that FDIC insurance fails to cover employee theft (and etc.) is a valuable one, something of which readers here might not prior have been aware.  I myself did not know about the banker's bond you mention.  Certainly that's worth inquiry on a bank by bank basis.

I'd be intensely interested to know whether there is a "banker's bond" for credit unions.  Of course it would not be a banker's bond per se, it would most likely have a different name and might even take a different form.  But I wonder how credit unions deal with this.  My curiosity is prompted by the fact that most of my savings are currently with credit unions, not banks.  And I've always viewed "employee theft" (and etc.) as my largest vulnerability.

BTW, the "and etc." part of "employee theft" actually happened to me years ago.  It was not an employee of the financial institution where my funds were on deposit.  Instead, it was an employee of one of their trusted vendors, who worked on site and had (as it turns out, too much) access to "inside the institution" stuff.  It was not a happy or pleasant experience, I can tell you that.  But the institution, in the end, made everything right to the best of their ability.  I cannot really remember when it was.  But that might have been when I first learned the FDIC and the NCUA do not want to hear about your problem, or your loss, when it's an instance of fraud as opposed to institutional financial failure.

People who believe their money is safe "no matter what" are sadly misinformed.  And neither the FDIC nor the NCUA go out of their way to shine any light on this situation.  So, Ken, thanks again.  You are performing a real public service here!
  |     |   Comment #5
I'm more concern about our government running huge deficits and destroying our savings than the bank's fraud. There are other laws that will save the people from rogue employee(s).
All the money transfers in and out of any financial institution are monitored daily and cross referenced with the sender and receiver. Huge money transfers are red flag automatically and it is next to impossible to commit a fraud because a delay and secondary confirmation will be required from the managers and even headquarters.
Please read this reality check on Obamacare:
  |     |   Comment #21
All the comments were relevant to bank safety until this one.  Obsessions about Obamacare belong on a political website.
  |     |   Comment #24
You do realize that said cost has been on everyone for.... just about forever, correct? Illegals aren't covered under the ACA, so that cost was never in fact added or decreased. It's likely that the executive order will decrease overall healthcare costs as immigrants stop using emergency rooms and move onto regular outpatient care for medical needs.
This is already far too off topic. Has nothing to do with banking whatsoever. Oh, and to the OP: Providing a link at Faux News and saying it's a "reality check"? LOL. Perhaps you need a reality check yourself.
avid reader
  |     |   Comment #6
Every time I open one of your articles In IE, It opens to the end of the piece.
Ken Tumin
  |     |   Comment #23
Sorry for the IE quirk. We are unable to see the problem. How are you opening the article? Are you opening the article from an email alert? Or are you clicking the article title from the main blog page?
  |     |   Comment #8
There's always something new to worry about...haha
  |     |   Comment #9
Ten months ago, I wanted to transfer 300K from my bank to my wife's bank. I got 4 telephone calls from my bank and 3 calls from my wife's bank to confirm the identity and the intend.
Next day I got call from a secret service agent to confirm my SS# and my wifes SS# and they wanted to talk to her and verify some other info.
Now imagine if the amount was in the millions, the transfer will go through at least 50 check points and the possibilities for such frauds is next to zero.
Now imagine if the destination bank is overseas, no employee can do such transfers unless he or she are organized crime people and the destination bank is on the scam and intermediary transfer people are on it too.
Therefore, such fraud in today's age can not be done easy or by single wolf.
  |     |   Comment #10
"They" only look at "small" transactions!
  |     |   Comment #11
#10. All transfers, regardless of the amount, go through the treasury department if the accounts are to different names or different SS numbers, no exceptions. I found this from the secret agents talks before, who explained to me why those transfers are monitored.
  |     |   Comment #14
Wouldn't expect "them" to say otherwise.  There are not enough "agents" to monitor same.
  |     |   Comment #17
Poster 14, the monitoring is automatic and only the flagged and questionable transfers need an OK from the treasury to clear. Without that settlement to proceed order, the bank must hold on the transfers.
In reality it is less than 1% of all transfers initiated by the customers that are flagged.
  |     |   Comment #19
Poster 17, unless the bank is big enough and makes money on the deal.  How many big banks were involved with "money laundering" and only got their fingers slapped by the Feds?
  |     |   Comment #16
From a contract perspective..."whatever happened to not have the funds to honor a proper request for same," is a breach of contract.  It is the responsibility of the financial institution to honor their agreements!  If "they" don't, lawsuit or (in)voluntary bankruptcy!  Thus the shareholders are the most at risk since they could get wiped out (creditors, i.e. "us" have greater priority) and loss of jobs if the "ultimate" happens. 

Therefore, management attention, changeover in senior people, (I recall seeing a post here on a CFO leaving), compensation policies, etc. are significant considerations...including most importantly the "little" things (they usually reflect, in an auditor's view, "bigger" problems) like customer service!!!!
  |     |   Comment #20
Your money is not save at all.  Whether in a U.S. bank or even in CASH. 

Carry a large quantity of  cash with you and it can be confiscated as suspected drug money without even an arrest being made, let alone a trial and conviction.  And most of that money is never returned to perfectly  innocent people carrying their life savings around with them.  Don't believe me?  Do a little research.
  |     |   Comment #28
I'm most concerned with biz accounts. I've heard cases where small biz owners have lost quite a bit from their banks due to fraud.

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