How Safe Are Your Bank And Financial Accounts?

The coronavirus has weakened our financial markets and our economy as social distancing has slowed economic activity. With high unemployment and tweaked growth, we have been in a recession. Many people are hurting. Unfortunately, there are many who like to take advantage of those who distracted by losing jobs, keeping businesses afloat, and worrying over the tragic virus. 

Are You Financially Safe?

Are your bank and financial accounts safe during this time? Yes, it is to a great extent. However, it is essential to know if your funds are secure. That varies by product and how it is offered. Which accounts are insured and from what potential risks?  We will review the different financial accounts you have. You also need to consider the safety of your bank. The last recession-plagued banks either were acquired by larger banks or collapsed. More than 450 banks failed across the US during 2007-2012 according to the FDIC.

We will discuss your financial accounts at banks, credit unions, and at your brokerage firm. Our stocks and bonds carry more risk than bank accounts. Recognize that fraud may rise due to swift economic changes. We have some recommendations below to better protect yourself. But first, a little background on where we are today given the havoc caused by the coronavirus.

The Federal Reserve’s Emergency Measures

The Fed has taken massive emergency measures not seen since the Great Recession, which we address here. Chair Jerome Powell deserves credit for aggressively providing liquidity to lenders and our financial system swiftly. We need to see these actions.

Thus far, Powell and his troops have reduced their benchmark fed funds rates to near zero. They lowered the Fed’s discount rate used for those banks that couldn’t borrow from peer banks. The Fed will lend to those banks as the banker of last resort.

As part of their program, they have purchased considerable amounts of government and mortgage securities and will do more. They have adopted similar quantitative easing levels used during the last recession. Also, they reduced the reserve requirement ratio to zero from the standard 10% level. A lower reserve requirement means that banks can increase the lending of their deposits in their vaults. Banks are being encouraged to lend 100% (from 90% regularly) of their capital to businesses and consumers in need.

There will likely be more liquidity sources from the US government, Small Business Administration, and the private sector as the Biden Administration takes over. There is a movement to provide increased financial support.  Check your local websites for more information

From Economic Stability To Economic And Financial Market Volatility

Today, banks are more robust than during the last recession. However, credit pressures are now rising, and cash is needed by many. That is especially true for small companies, their employees, and households who don’t receive paid sick leave. Fear of the virus spreading has required us to change how we interact, shop, and dine. Social distancing has become the new norm.

After a long economic recovery and a bull market, we are now moving into an environment reminiscent of the severe recession of 2007-2009. Then, failures of financial institutions caused bank customers to try to liquidate deposits. The Fed is trying to avert a credit crunch.

Fraud often rises in this environment. As a result, use available security features to protect ourselves from gaps related to new digital technologies. As consumers, we need to know what risks exist. We provide some recommendations.

Another question you may ask: how safe is your bank? Bankrate reviews and rates various banks. Banks with $1 billion in assets are typically more vulnerable in weak markets we have now. Check this list for your bank from time to time to make sure they are not troubled.

Financial Crisis Left Some Bad Memories

Market liquidity failure caused the Great Recession. Rumors and false news were always around. I remember watching Citigroup shares dropped to $0.97 per share in March 2009. Investors lost confidence and feared that more than Lehman would collapse. The market value of Citigroup fell below $6 billion from $277 billion in late 2006. People were standing in lines around the block at a New York City midtown Citibank location to withdraw their money. No one wants to revisit that scenario.

According to the Federal Deposit Insurance Corporation (FDIC), more than 450 banks failed from 2007-2012. Most of those that collapsed were smaller banks. While we are not facing such a scenario today, it is worth knowing what kind of protections are available for our financial accounts.

FDIC Insurance For Deposits At Banks And Thrifts

The FDIC insures deposits in banks and thrifts of up to $250,000 per depositor ($500,000 for joint accounts), per insured bank for each account. To check if the FDIC covers your accounts, you can check their estimator.

Most banks fall under the FDIC insurance mandate. State banks may have insurance coverage if they are members of the Federal Reserve. So are state-chartered banks that are not members. There are very few state banks that do not have FDIC insurance. You can check here.

What Accounts Qualify For FDIC Protection

You have coverage for deposits in accounts for savings, checking, negotiable order of withdrawal (NOW), money market deposit account or MMDA (but not money market mutual funds), time accounts like a certificate of deposit (CD), cashier’s check, or money order.

To maximize coverage, you can open accounts at different financial institutions and for other accounts. However, different branches do not count as a separate bank. If you are holding money in qualified accounts, like savings or money market securities, you may have coverage for retirement accounts, specifically for traditional IRA and Roth IRA. However, keeping your retirement savings in money market accounts are not a good way to build a nest egg.

What Is Not Covered

FDIC does not insure bonds, stocks, Treasury securities, mutual funds, annuities, municipal securities, life insurance policies, safe deposit boxes, or their contents or any investments. These financial products are protected separately by the Securities Investor Protection Corporation (SIPC). We will discuss this below.

What The FDIC Does Not Protect But Other Federal Laws Do

The FDIC does not protect bank customers from losses associated with bank robberies or thefts, including identity theft, fraud, or privacy.

While identity theft, fraud, or privacy is not protected by the FDIC,  report any occurrences to the Federal Trade Commission (FTC) as soon as you discover them. If your credit, ATM, or debit card is lost or stolen, federal law limits your liability for unauthorized charges. Report it immediately.

Data breaches have become more common in recent years. In this guide, we discuss what you should do if these fraudulent transactions hurt you.

The Electronic Fund Transfers Act (EFTA)

Consumer risks rise with the increase of instant electronic payments. The Electronic Fund Transfer Act (EFTA), also known as Regulation E, protects consumers when using electronic means to manage their finances. This federal law covers transactions that use computers, phones, or magnetic strips to authorize a financial institution to credit or debit a customer’s account.

Electronic payments often take the place of traditional paper checks. More consumers are banking online. While people still use paper checks, fintech adoption is expanding. Specifically, peer-to-peer payment (P2P) providers are enabling instant transfers via mobile apps like bank-sponsored Zelle and Paypal’s Venmo.

Fintech Platforms Are Convenient But Need To Be More Secure

These products were likely not anticipated by EFTA. As a result, they may have raised consumer risks without enhanced protection against data security and privacy breaches. However, providers are strengthening their products.

Statista estimates a total 2019 transaction value of $4.1 trillion in digital payments, with an average transaction value of $1,102 per person. However, an S&P Global Market Intelligence Fintech late 2018 survey reports consumers avoiding these mobile apps cite security as a significant concern.

Consumers should be responsible when using these P2P platforms. Peer-to-peer products are convenient for sending money quickly to those we owe money. Just make sure you are sending it to the right party. P2P users should double-check the relevant address, number, or username of the person they are trying to send money to. We can make mistakes, or worse, be defrauded.

Consumer Reports (CR) reviewed peer-to-peer payment providers comparing their safety features. They called for the EFTA to extend protections for unauthorized transactions when potential fraud may occur. 

NCUA Protect Credit Unions 

Credit unions are financial institutions like banks. They are member-owned financial cooperatives. Members, usually union workers, control these entities. They are nonprofit organizations, offering savings accounts and loans like a bank.

However, the National Credit Union Administration Insurance Fund (NCUAIF), not the FDIC,  insures credit union members’ accounts with $250,000 in coverage for their single ownership accounts. They cover the same type of accounts as FDIC but refer to accounts as “shares or share drafts” for savings and checking accounts.

If you go over the federal limit of $250,000, you can ask your bank or credit union if they offer private deposit insurance for more coverage.

 You can find an estimate of whether your share is covered, check here.

SIPC Provides More Limited Safekeeping For Investors

SIPC provides coverage for investment assets held in a brokerage, limited to the custody function. They only protect customers of member broker-dealers if the firm fails financially. The Custody Rule is to safeguard client funds or securities against the possibility of being lost, harmed, or misused.

Coverage is up to $500,000 for all investment accounts at the same institution, including a maximum of $250,000 held in cash.

No Coverage For Market Losses

SIPC does not provide blanket coverage. Market risk is not covered, meaning investors’ losses from the declining security values are uninsured. Investors assume all losses.  It’s part of the higher risks (and rewards) of investing in stocks and bonds. The latter securities are subject to more market fluctuation than risk-free and liquid cash and cash-equivalents insured by FDIC.

Instead, SIPC’s coverage protects unauthorized trading in customer accounts for stocks, bonds, treasuries, CDs, mutual funds, including money market mutual funds. They do not protect commodity futures.

Retail investors, including young investors and traders, increased participation to 20% of the market trades by mid-2020, up from 10% in 2019. Attracted to the rising stock prices, inexperienced investors may ultimately lose money if they are not fully aware of the risks. Retail stock trading app Robinhood, a SIPC member, has ramped up a young customer base in recent years. Like all brokerage firms, they need to make their customers aware of the risks they assume.

Where FINRA Comes In

The Financial Industry Regulatory Authority or FINRA is a self-regulating nonprofit organization overseen by the Securities Exchange Commission (SEC). While SIPC does protect market losses, consider filing a dispute against the broker if they bought securities that were unsuitable for your portfolio. FINRA resolves disputes between investors and brokers through arbitration and mediation.

If the broker sells worthless securities to a customer, the customer will file a complaint with FINRA, not SIPC.  FINRA is responsible for monitoring the broker-dealer industry. They oversee that qualified and licensed brokers remain so. Securities sold to investors must be suitable based on that individual’s needs and risks adequately disclosed. For example, selling high-risk securities to retirees is not generally appropriate.

For a time, I was an active FINRA arbitrator, hearing alleged injured investors and their brokers after stocks fell during the severe recession. Many investors lost a lot of money in fanciful mortgage lenders like Countrywide.

How Can We Better Protect Ourselves From Fraud

 Mandated consumer protections for our financial accounts only go so far. We need to have a healthy dose of skepticism and take our own precautions. Digital technologies are growing faster, providing us with more capabilities and convenience. Compliance gaps exist among incumbents (like Wells Fargo) and fintech companies.

Here are our recommendations to protect thyself:

 

1. Be Alert To Imposters And Phishing Emails

According to the FTC, scammers are sometimes posing as someone you can trust, such as a family member, government official, or charity. Never send money or give out personal information in response to an unexpected request.

2. Safely Dispose Of Your Personal Information

Use a paper shredder or wipe your computer’s hard drive. Find ways to delete all your information from your smartphone and remove your SIM card. To be honest, I keep all my old electronic devices.

3. Don’t Use Public WiFi

In the recent past, I always used Starbucks’s wifi, literally living at my local place when studying for the bar (to practice law). Now, we encourage our kids to use public wifi rather than drive up our data bill. No more! We find it easy to connect to public wifi because there isn’t authentication that is beneficial for hackers.

4. Don’t Believe Your caller ID 

It is effortless for scammers to use fake names and numbers. I have picked up my house phone because I recognized my own cell number. I hung up that baby so fast that I almost broke my phone. My house phone is on borrowed time.

5. Consider How You Pay

While credit cards have significant fraud protection when detected, wiring money does not. According to the FTC, wiring money is among the worse methods you can use to send money. If you are using Western Union or MoneyGram,  be aware that you can’t get your money back.

When I worked on a case for the court, an elderly woman who was losing her mental capacity was literally giving away a large portion of her significant net worth through MoneyGrams. She had a constant caller asking her to meet him in mysterious places in her neighborhood. Her family was unaware of her declining capacity or her constant money wiring until they found huge withdrawals.

When using Venmo, Zelle, or Apple Pay, make sure you are sending money to the correct party. Check the recipient’s address and contact info.

6. Keep Your Passwords Private

Young people tend to overshare everything including their smartphones, and often will provide friends their passwords. Change passwords often and use strong passwords. For those who worry about forgetting a password, use a password manager.

7. Don’t Carry Your Social Security Number In Your Wallet 

I am preaching the obvious but don’t carry any private information containing your social security number. That number is your identification and on many different kinds of documents, such as credit card applications, bank applications, or your health plan. You never want to lose your identity to others.

8. Review Your Credit Report For Possible Issues

The three nationwide credit reporting companies–Equifax, Experian, and TransUnion–are required to provide you with a free copy of your credit report at your request, once every 12 months. You can also visit annualcreditreport.com for your free report. The FTC does not recommend that you use other websites for free reports.

9. Monitor Your Personal Statements

Review all your statements when you get them and call vendors when you spot a mistake. Check your deposit balances daily. Sign up for text alerts with your bank.

10 Don’t Open Suspicious Emails

When you get mail with a bank name, scrutinize it carefully. Don’t open links from someone you don’t know or appear to be suspicious. Your bank will text if they see unusual spending or call you.

For more on how to protect your privacy, see here. If your child has their own bank account or credit card, they need to take precautions as well.

Final Thoughts

Our financial assets are important to us. We need to make sure our accounts are safe from outside factors and take our own precautions. Our bank accounts are insured by the FDIC. To a lesser degree, so are our investment accounts by SIPC. As we do more banking online and use P2P platforms, we need to be aware of increased risks and take precautions.

Technology is a wonder given its convenience. Banks (and businesses overall) have increased data privacy and security. For the most part, our accounts are generally safe. Most importantly, I hope you and your families stay healthy.

Thank you for reading!

How are you fairing in this crazy world? What precautions have you taken that work well? We would like to hear from you.