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The Truth About Bank Failures and Lightning Deaths

By Features MoneyRates.com

"The only thing we have to fear is fear itself."

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Those words were, of course, spoken by Franklin D Roosevelt. However, since Roosevelt was the president who saw America through most of World War II, many people mistakenly assume his famously reassuring words had something to do with that conflict. In fact, Roosevelt's words were spoken as part of his first inaugural address in 1933, and referred not to war but to the Great Depression.

Given the economic strains of recent years, Americans could use a similar dose of reassurance. A recent Rasmussen Reports survey found that 42% of respondents fear losing their money in a bank failure. Less half of the survey's respondents expressed that they were at least "somewhat confident" in the stability of America's banks.

As Roosevelt would have recognized, this lack of confidence is important, because fear can play a major role in making a bad financial environment even worse.

Irrational fear?

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On first blush, it would be easy to dismiss the fear of losing money deposited in America's banks as being wholly irrational. After all, since the Great Depression, FDIC insurance has been available to protect American bank customers. In reaction to the 2008/2009 banking crisis, the amount of FDIC insurance was raised to $250,000 per depositor, per bank. That's more than enough to cover the typical bank customer -- so why should 42% of them fear losing their money?

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Statistically, it would be more rational to fear death by lightning. According to the Journal of Environmental Health, this happens at a rate of 0.23 occurrences per million persons in the U.S. In a population of about 300 million, that comes to around 69 such deaths per year.

Rationalizing the irrational

Rationally, then, anybody who is under the umbrella of FDIC insurance shouldn't fear for their deposits -- unless that fear becomes a self-fulfilling prophecy.

Like any insurance, the FDIC program is funded on the assumption that the insurance will only be called upon in a small minority of cases. It is theoretically possible for a high level of fear to stress that system. In short, the fear is only irrational until it becomes widespread.

Savings accounts look underpaid

Rational or not, if so many people doubt the safety of their bank deposits, there is a disconnect between that fear and the ultra-low level of today's interest rates on deposit accounts. People normally receive some benefit when they put their money at risk. This is referred to as a "risk premium." With interest rates near zero, people who worry about the safety of their money in a bank are taking a perceived risk for virtually no compensation. Now that's truly irrational!

Rational or irrational, people's fears have to be taken seriously, because fear is a dangerous force in economics. These days, "fear itself" may not be the only thing we have to fear, but it should certainly be on the list.

The original article can be found at Money-Rates.com:
The truth about bank failures and lightning deaths