Are banks safe in a recession?

Despite the way many are feeling, the economy looks strong on paper, with inflation at a four-year-low and the job market outperforming expectations. However, worries are rising among consumers and investors that the Trump administration’s new tariffs could increase inflation or even cause a recession. In fact, consumer sentiment has fallen to its lowest level since 2022, according to the University of Michigan’s consumer sentiment poll.

Economists say there’s now a more than 1-in-3 chance of a U.S. recession in the next 12 months. With recession alarm bells ringing, consumers may be worrying about how to protect their finances, as well as whether their money is safe in the bank during an economic downturn. 

Is a recession on the way?

The National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” At present, we are not in a recession. Based on the latest readings, the annual inflation rate has decreased, unemployment has remained relatively stable and the gross domestic product (GDP) has increased in the fourth quarter of 2024.

However, the odds of a recession by March 2026 have increased to 36 percent, according to Bankrate’s latest economic indicator poll. Nearly all economists surveyed said trade policy and policy uncertainties could be drivers of a recession.

“Job losses, falling consumer spending, reduced business investment and below average or negative GDP growth are all symptoms of a recession,” says Stephen Kates, CFP®, Bankrate financial analyst.

Kates points out with the number of jobs available greater than the number of unemployed people in many states, it would be hard to create a recessionary environment.

“However, if consumer spending locks up and businesses scrap their plans for growth or investment, available jobs may shrink. If businesses contract due to thinner margins from higher import costs, layoffs may rise,” Kates says, adding that these can all have self-reinforcing effects that create a stagnant economic environment that leads to a recession.

Should you keep your money in the bank during a recession?

While many bank failures have occurred during times of economic decline, your funds are safe in a bank that’s insured through the Federal Deposit Insurance Corp. (FDIC), which protects depositors’ money in the event of a bank failure. Among FDIC-member banks that have failed since the FDIC’s creation in 1933, no insured depositor has ever lost funds that are insured.

Similarly, credit unions are covered by federal deposit insurance when they are members of the National Credit Union Administration (NCUA). This government agency provides insurance for members’ funds through the National Credit Union Share Insurance Fund (NCUSIF).

With federal deposit insurance, your funds are protected by up to $250,000 per depositor, per financial institution, per ownership category. Ownership categories include single and joint accounts; as such, if a savings account has $500,000 and two joint account holders, it would be fully insured because each account holder is insured for up to $250,000.

“FDIC and NCUA gives savers peace of mind that their money is safe and will be there when they need it,” Kates says. “Savers should be careful to remain within the limits of these protections.”

Deposits in a checking account, savings account, money market account or certificate of deposit (CD) are protected, up to the maximum amount, when the account is with an institution that has federal deposit insurance. Some examples of products that are not covered include:

How much cash should you keep at home?

Some consumers may feel it’s important to keep some cash at home. However, keeping the money in a place such as a federally insured high-yield savings account provides the benefit of compound interest, and money in the bank can be less likely to become lost, stolen or ruined due to an unforeseen natural disaster.

If you’re keeping any cash at home, the right amount depends on your typical cash needs, Kates says. “If you run a cash-heavy small business, you may want more than average. If you very rarely use cash in your personal or business life, then a little might go a long way.”

What happens if my bank fails?

A bank may fail when it cannot meet its obligations to depositors or creditors. When an FDIC-member bank becomes insolvent, the FDIC will do one of the following within a few days:

• Provide each depositor with a new account at another insured bank that contains the same insured balance they held at the filed bank
• Issue a check to each depositor for the amount of the insured balance at the failed bank

If your bank were to fail, the FDIC would immediately mail you a written notice, sent to your address on record with the bank. If another bank acquires the failed bank, the acquiring bank would send you a notification as well.

History of bank failures during recessions

Since the Great Depression of 1929-1933, two major banking crises have caused hundreds of institutions to fail, according to analysis of FDIC data from the Pew Research Center. These entailed:

• Savings-and-loan crisis: In 1980-1995, more than 2,900 banks and thrifts failed that had collective assets of more than $2.2 trillion.
• Mortgage crisis: The subprime mortgage crisis and ensuing global financial crisis spurred more than 500 bank failures between 2007 and 2014, and these had total assets of nearly $959 billion.

Recessionary periods took place during both of these timeframes, including the Great Recession that lasted from December 2007 to June 2009.

While 2023 wasn’t a time of economic recession, several prominent failures occurred that year among banks with federal deposit insurance:

Bottom line

Money in federally insured deposit accounts at a bank or credit union is guaranteed as long as it’s within the stated limits and guidelines. Keeping your money in such an account ensures you won’t lose the funds should the financial institution fail, whether that occurs during a recession or healthier economic times. Because of this, keeping your money in the bank can be safer than keeping it inside your home.