Is Your Emergency Fund at Risk Because of the Banking Crisis?

Emergency funds are a financial cushion against the unexpected, whether it's a job loss, vet bill, or medical emergency. It isn't always easy to build an emergency fund. So if your savings are well stocked, congratulations. Not only can having three to six months' or more of living expenses in the bank give considerable peace of mind, it's also something to be proud of.

That said, it may also make the current banking crisis all the more stressful. However remote the possibility, the idea that all your savings efforts could be undone by factors outside of your control is nerve racking to say the least. However, it is extremely unlikely that you'll lose your savings because of issues in the banking world. Read on for two key reasons why.

1. No savers have lost their deposits

Back in the 1930s, thousands of banks failed, wiping out billions of dollars of savings. Almost a century later, and there are a number of safeguards to ensure history does not repeat itself. One key protection is FDIC insurance, which covers up to $250,000 per bank, per customer, per account type.

We may have seen three huge bank failures this year, but none of their customers lost the money they'd deposited. Indeed, the FDIC says, "No depositor has ever lost a penny of insured deposits since the FDIC was created in 1933."

Sure, the FDIC draws a distinction between insured and uninsured deposits. The majority of banks are covered by FDIC insurance, but it's worth double checking yours just in case. Plus, there are limits. A decent chunk of banking deposits are over the $250,000 threshold and therefore fall outside the FDIC coverage.

Even so, in the recent bank failures, people's money was safe even if they had more than $250,000 in the bank. People with uninsured deposits did not lose their funds when Silicon Valley Bank and Signature Bank collapsed. And JPMorgan Chase took First Republic's accounts, including those with uninsured deposits, so those customers didn't lose their cash either.

There are no guarantees about what might happen if more banks collapse. That's why you might want to take steps to protect your savings if you have significant sums of money in your accounts. There are a couple of moves you can make if you have over $250,000 in the bank. For example, you could open a bank account with a different bank, which would effectively give you double the FDIC insurance. Depending on your situation, you could also consider a joint account, which would give you additional protection.

2. The worst may be over

It's been almost a month since JPMorgan Chase acquired First Republic. The hope is that the acquisition marked the end of the SVB fallout, and so far, this looks likely. It certainly appears that the most pressing issue of worried customers withdrawing their funds is easing. The reason that matters is that your bank is less likely to fail if the dominoes have stopped falling.

That isn't to say we're home and dry -- as American Banker points out, there's still the lurking bogeyman of commercial real estate (CRE) to contend with. High interest rates combined with high vacancy rates in office rentals are a source of considerable pressure for this market. Unfortunately, small and mid-sized banks have a lot of exposure to the CRE market. These institutions may have weathered the SVB storm, but there's a chance the issues in CRE could still drag them under.

Is your emergency fund at risk?

Given how important emergency funds are to our financial stability, fears about the impact the banking crisis could have on yours are understandable. However, FDIC insurance is a powerful force, as are the other safeguards in place to protect your money. Nearly all banks are covered, and there's a similar protection for credit unions called National Credit Union Administration (NCUA) insurance.

On top of which, having your money in a high-yield savings account is safer than many of the alternatives. This is not the time to withdraw your money and keep it under the proverbial mattress. Not only are savings accounts earning high rates of interest right now, bank accounts are much better protected against thieves than most household security systems.

Bottom line

Simply put, authorities do not want Americans to lose faith in the banking system. As we saw with SVB, they will take steps to ensure people don't lose their deposits. In the unlikely event that your bank fails, as long as your account is FDIC insured, your emergency fund is still in the safest place it can be.