Are banks really safe? It’s a question that has been asked a lot lately, in light of the recession and global financial crisis.

In the past, banks are often thought of as being safe places to store money. After all, they are regulated by government agencies and have to follow certain rules in order to stay in business.

However, the public’s faith is severely rocked during the Great Depression and more recently, the Great Recession.

Bank Collapses During the Great Recession

During the Great Recession in 2008, there was a collapse of several major banks and financial institutions. This financial crisis was caused by a number of factors, including subprime mortgages, risky lending practices, and a housing bubble.

As the bubble burst and housing prices began to decline, borrowers found themselves unable to make their payments and defaulted on their loans. The banks and financial institutions faced huge losses with some being forced to close down, including the Lehman Brothers and Bear Stearns.

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Safe, but to a certain extent

This is why it’s important to remember that banks are for-profit institutions and their primary goal is to make money for their shareholders. This means that they may take risks with depositors’ money in order to seek a higher return.

Additionally, while all banks operating in Singapore are required to carry insurance under the Singapore Deposit Insurance Scheme (SDIC), this insurance only covers deposits up to S$75,000 per depositor per Scheme member basis. This means that your deposits will be covered up to only S$75,000 for each bank. So, if you have more than this sum in your bank account, only $75,000 of it is actually protected in the event of a bank failure during any global financial crisis.

For those who have money under the CPF Investment Scheme (CPFIS) and CPF Retirement Sum Scheme (CPFRS), the amount is aggregated and separately insured up to another S$75,000.

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Other Dangers Of Keeping Your Cash In Banks

While banks are SDIC-insured, this only protects against loss in the event of a bank failure during any financial crisis. Your money is still vulnerable to other risks, such as online scams, identity theft, and inflation.

1. Online scams

Online scams are becoming more common in Singapore. In fact, a whopping total of S$227.8 million was lost in the first half of 2022, up from the S$142.5 million lost in the same period last year, according to the Singapore Police Force. Many scammers pose as legitimate individuals or businesses and trick Singaporeans into sending them money. They may also set up fake websites that look like the real thing, in order to lure people into entering their bank login information.

2. Identity theft and/or data breaches

Other than scams, identity thefts may also occur. If a scammer gets your bank account information, they may be able to open new accounts in your name and rack up debt. This can damage your credit score and leave you with large bills to pay.

Banks are also susceptible to data breaches, which can lead to the theft of sensitive information like your NRIC numbers and addresses.

3. Loss of money due to inflation

Lastly, there is another risk to consider: inflation. Over time, the purchasing power of your money will decline as prices rise. This means that the same amount of cash today will buy less than it would in the future. For example, $100 today might be enough to purchase a big basket of groceries, but in ten years it might only cover the cost of two to three items.

How to Safeguard Yourself

1. Diversify across bank accounts

The easiest way to safeguard yourself against possible bank failure is to spread your money across various banks. If you have S$150,000, deposit your money into two separate accounts (S$75,000 each). Both your deposits will be fully covered since the SDIC is on a per depositor per scheme basis.

2. Diversify your investments

However, while keeping your cash in the bank is one possibility, it generally doesn’t yield a high return. There are a variety of other investments that can offer security and potential for growth.

Bonds like the Singapore Savings Bond and endowments are recommended for the risk-averse, Exchange-Traded Funds (ETFs) are ideal for the medium risk taker, while stocks and other more speculative forms of investments are for individuals who can stomach higher volatility.

It is important to note that the SDIC does not cover foreign currency deposits, structured deposits, as well as investment products like unit trusts, shares, and other securities.

3. Other safer alternatives — Insurance Policies

The SDIC Policy Owner’s Protection Scheme (PPF) protects consumers against a potential failure of a life or general insurer of a PPF’s member. Although it is compulsory for all MAS licensed insurers to be a PPF’s member, some exemptions are given, the full list of the PPF’s members can be found in this link.

Under this scheme, it provides protection for life insurance policies. Life insurance policies in this definition is an umbrella term that consists of both life, endowment, annuity and accident and health policies under both individual and group insurance. If you wish to maximise your cash protection, endowment policies are secured up to S$50,000 per endowment policy. So if you have 10 endowment policies with one insurer, you could have S$500,000 protected under the SDIC’s PPF scheme.

Be On Guard And Diversify Your Holdings

So back to the question — are banks truly safe during the global financial crisis? It’s a question that doesn’t have a simple answer. On one hand, banks in Singapore are subject to strict regulation and are required to maintain certain levels of reserve capital. This makes them much less likely to fail than other types of financial institutions.

However, your cash in banks may still be susceptible to other forces, such as online scams, identity theft and breaches, as well as inflation. It’s important not to simply rely on one bank or investment and diversify your holdings. After all, there’s no reason to keep all your eggs in one basket.