FINANCIAL SAFETY COMPARISON:
BANK VS. INSURANCE COMPANY DEPOSITS
Michael Tove, CEP, RFC
The vast majority of Americans regard their
banks as a safe and secure place to keep
their money – and with good reason. They
are among our most familiar and basic
service institutions and have held a place in
our culture as the cornerstone of any
community since the founding of the
country. In addition, most banks are backed
up by FDIC insurance which adds another
layer of confidence. However, banks do not
hold the exclusive rights to claims of safety
and in many regards take a back seat to
another age-old financial institution in
America – the insurance industry.
Banks are primarily lending institutions.
They borrow money from their depositors
and loan it out (or back to you) at a higher
rate of return than what they pay. The rate
at which they lend money and even the
amount of money loaned is determined in
large part by federal monetary policy (the
FED). There are two primary tools of
monetary policy: the prime interest rate (the
rate banks charge each other for short-term
loans) and the minimum reserve require-
ment the required minimum amount of
money from deposits the banks may NOT
loan.
Banking Industry Safety Record
During the 20th century, the banking
industry suffered two catastrophic losses.
The first occurred following the stock
market crash of 1929 and was the cause of
The Great Depression. Prior to the market
crash, people (and financial institutions)
were buying investments on borrowed
money (called margin). Then as the value of
those investments grew, investors borrowed
more to buy more, etc. When the crash came
(“Black Tuesday” – October 29, 1929), the
lenders demanded repayment of the loans
to pay off their own debts. What followed
was a run on the banks to withdraw cash
that essentially did not exist. In fact, the
amount of money demanded for loan
repayment actually exceeded the amount of
printed money in circulation. The banks
failed and the Great