Is My Money Safe?

In the famous Christmas movie It's a Wonderful Life, the townsfolk lose confidence in their local savings and loan and demand the balance in their accounts, immediately, creating what is known as a "run" on the bank. Fortunately, all ends well with a cheery Hollywood resolution, but in these uncertain times many people are wondering if their bank is safe.

In other words, if everyone walked into their local bank tomorrow and demanded their cash, would there be enough to cover the bill?

According to Robert Sumner, CEO of First National Bank of Pasco (FNB Pasco) near Tampa, Florida, "No bank has enough cash on hand to cover all of its accounts were they to suddenly demand withdrawal."

"Instead," Sumner explains, "Banks use a very sophisticated system to determine just how to cover all their assets and liabilities in case of emergency or a complete lack of consumer confidence."

This system provides a safety net, of sorts, should you need your money quickly, should an actual crisis occur or, worst case scenario, if there was indeed a run on the bank and everyone panicked for one reason or another.

For instance, if the bank has assets that number $100,000,000 it doesn't necessarily mean they have that much money in the vault. Maybe they have a portion of that on hand. The rest can be obtained by liquidation of investments and borrowings already approved and in place within the system that relies on the bank's private and federal connections.

Explains Sumner, "To stay liquid, you wouldn't have 100 million dollars on hand, a lot of that is being invested for our customers, but if you had 50 million dollars, well, you have to ask yourself how are you going to get another 50 million dollars in cash to pay these people off that have lost confidence in the bank? That's the liquidity issue."

What's the solution? "Well," according to Sumner, "we have a staff VP that goes through the liquidity issue every day. We have so much money in cash. We have so much ability to borrow from other banks through the Federal Reserve System called ‘Fed funds.' We have, let's say, millions of dollars in securities we could sell. We also have a line of credit with Federal Home Loan Bank Board. And so our bank VP has a chart there, showing where the monies could be obtained if absolutely necessary."

In other words, if there's a "run" on the bank because of lost consumer confidence, one bank at least could pay their tab - and then some.