A client of mine, John, called last month asking what he should do with some extra cash sitting at a local bank. I asked what “extra” meant and what he wanted to accomplish. He paused for a moment and said, “Well Joe, I have more than the FDIC limit in three local banks I haven’t told you about yet.”
I laughed and told John we needed to meet soon. I asked him to bring all bank statements so we could put together a proper plan. I added that I need to know where his assets are to give the best advice.
John’s story isn’t unusual. Many Texans trust local banks more than large national institutions because community banks feel personal and tied to the town. I understand that. But blind trust can hurt you financially if you don’t know how banks really work.
How Banks Work
A bank is not a vault where money simply sits. It is a business that takes in deposits and then loans most of that money to other customers for mortgages, cars, businesses, and other personal needs. They also buy government bonds and other securities.
Their profit comes from the net interest margin, the difference between the higher rate earned on loans and bonds versus the lower rate they pay you on deposits. The more they lend and invest, the more they stand to profit.
However, for every dollar banks take in deposits, they typically lend back out 90% of it. This can work, as long as loans perform as expected. If too many bad loans accrue, it can cause a bank to fail, putting depositors at risk.
The FDIC Safety Net The Federal Deposit Insurance Corporation, or FDIC, protects deposits up to $250,000 per depositor, per bank. That insurance has saved countless families from losing everything during bank failures. But it has a hard cap. If you have more than that in a single bank and that bank goes under, the extra is not guaranteed. This is why it is imperative to review your accounts and make sure your cash is positioned wisely.
Lessons from Small Banks
The past couple of years have shown us how smaller banks can quickly get into trouble, some even in Texas. Many used deposits not just for loans, but also to buy long-term government bonds when interest rates were near zero. When interest rates shot up, the value of those bonds dropped. This caused the ratio of assets to liabilities to weaken.
If enough depositors decide to withdraw their money at once—a bank run—the bank may not have enough cash to meet demands. To raise money fast, they were forced to sell bonds at steep losses, often tipping them into default.
According to FDIC.gov, two banks have already failed in 2025. One was in Santa Anna, Texas, with $53.8 million in deposits, of which $2.8 million was above FDIC insurance limits. That is the size of bank many of us use in our own communities.
Banks vs. Brokerage Accounts
John thought banks were always safer than brokerage accounts. The truth is more complicated. A brokerage account, that holds stocks, bonds, or mutual funds, is not insured by the FDIC. That can make people nervous. However, brokerage accounts are protected by the Securities Investor Protection Corporation, or SIPC, up to $500,000 in case the firm itself fails.
More importantly, brokerage firms must keep client assets separate from their own. If a brokerage collapses, your securities legally remain yours.
Good examples of this were when customers of Lehman Brothers and Bear Stearns went under during the Great Financial Crisis. Not a single customer lost any assets in their brokerage accounts.
In comparison, a bank uses deposits for loans and investments. If it collapses, any deposits above FDIC insurance limits are at risk of being lost entirely.
The Bottom Line
Banks are essential, and play an important role in every community, but they are not invincible. The bank you have trusted for decades can face problems if conditions turn against it. Take time to review your accounts, know your FDIC coverage, and make sure you are not over the limits.
Do not assume “safe” means the same thing just because the account is at a bank. Work with your financial advisor to create a plan that keeps your money protected and aligned with your long-term goals.
Joe Olive, CFP, MPS, is a 10-year Air Force veteran who works as a CERTIFIED FINANCIAL PLANNER with Sather Financial Group, a feeonly strategic planning and investment management firm. He holds a master’s degree from Columbia University.
