Key Takeaways
The global financial crisis taught us that mismanaged banks are susceptible to failure.
Deposits up to $250,000 and brokerage accounts up to $500,000, are insured with the backing of the U.S. government.
The Federal Government and agencies have been quick to backstop major issues to protect the system.
There’s no reason to keep too much idle cash in your accounts when there are so many higher-yielding and more liquid places to keep your money.
“Running a bank is like investing. You don't have to do anything very smart. You just have to avoid doing things that are ungodly dumb." - Warren Buffet
By now, it is safe to assume the terms “bank run”, “FDIC”, and “bank failure” have been a staple on your television, and in your conversations. What you may not know, however, is that the failures of Silicon Valley Bank (SVB), and Signature Bank while alarming, are very unique, isolated instances and not a wholesale contagion of the banking system like we saw back in 2008. If you have the majority of your money invested in stocks and bonds, and you have less than $250,000 sitting in cash in any individual bank account, then you won’t be personally impacted by the disruptions at regional banks other than the temporary market conditions. The Federal Deposit Insurance Corporation (FDIC) insures all bank deposits up to $250,000 per depositor, per FDIC-insured bank. So, a married couple could theoretically have a minimum of $500,000 in deposits per bank insured by the FDIC. Since 1933, no depositor has ever lost a penny of FDIC-insured funds.
You never want to have more than $250,000 in a bank under a single registration, anyway. Not only is anything above that going to be uninsured, but you’re losing money while it sits there, especially with this new interest rate environment. Treasuries and most bank CDs will pay you a lot more in interest than you’ll get in most standard checking, savings, or “high yield” savings accounts at a bank.
Treasurys vs. CDs?
When it comes to deploying cash, many clients ask us if they should be keeping more of their short-term cash needs in CDs rather than treasuries. While at times, CD rates may be a little higher than Treasury rates, Treasuries have a major advantage which is liquidity. When you put money into a CD, the idea is that you will not need to touch the money at all until the point that the CD matures. These time periods vary just like a Treasury bond but whichever time period you choose, you should be absolutely certain you will not need to access that cash. On top of that, if your concern is having another regional bank fail, while you would not lose your money due to the FDIC insurance, it may be an administrative burden to get that money back in your hands in a timely manner. Treasuries, on the other hand, are virtually risk-free as they are issued by the U.S. government, which is the strongest financial system in the world, and have a huge secondary market should you need to access that money in a pinch. You can contact your financial planner to find out what the current rates are for both investment vehicles.
Where did all the money go from the failed regionals? First of all, the money hasn’t been lost. All the money at Credit Suisse and the failed regional banks is still in the economic system. The deposits are just being shifted to more stable banks, generally the larger money center banks. You might also hear sensational media headlines about bank deposits plummeting for all banks for the first time in decades. That’s misleading. Remember, banks received a massive infusion of cash during COVID due to all of the PPP loans and stimulus payments from the government. Consumers and businesses have been spending that money, thereby offsetting new deposits by the largest amount in history.
Still, bank deposits remain higher than at any time in history other than the peak COVID years of 2020 and 2021. The money is there. You shouldn’t worry about your accounts. So, even if you’re at a regional or local bank, as long as you don’t have more than $250,000 in cash sitting there, you have nothing to worry about. The FDIC has you covered. Further, I wouldn’t rush to shift your money from a local bank to one of the bigger banks unless you are unhappy with the services being provided at your local bank.
What about my brokerage accounts?
Charles Schwab and other broker-dealers may have also been on your radar, due to Schwab’s stock price recently dropping roughly 30%. Unfortunately, media coverage and social media posts about the regional banking crisis have caused many people to worry about their accounts at mega broker-dealers like Schwab, and at other big financial institutions. This is just a big misconception.
Schwab is the largest public broker-dealer in the U.S., and the most regulated, since it is also regulated by the Federal Reserve. Every client of a broker-dealer has SEC-mandated consumer protections. That means their assets are NOT subject to banking or credit risk.
In the unlikely event of a failure of a big broker-dealer, assets would typically be transferred to another broker-dealer without the intervention of SIPC at all. That being said, there is still insurance coverage for broker-dealers who are members of SIPC (the Securities Investor Protection Corporation) which will protect money market cash investments up to $500,000, but ultimately since cash in your brokerage account most likely resides in the broker-dealer bank, it would be insured up to $250,000. Is my local bank vulnerable?
As mentioned earlier, the woes of SVB, and Signature were isolated incidents and the result of a perfect storm of having too many depositors from the same volatile industry (i.e., high-tech or crypto), and way too many investments in longer-term bonds at lower yields.
This left them vulnerable to the Fed’s rapid rate increases starting last year. That in turn pushed the value of their long-term bonds down sharply. When news of their depleted bond holdings got out on social media, depositors overreacted and rushed to get their money out. This caused a modern-day “run” on the bank. SVB especially was forced to liquidate the value of its bonds at depressed prices and so it eventually ran out of money.
I wouldn’t worry about your local community bank, especially in this part of the country. Depositors come from all walks of life and are composed of people from the community. In other words, they’re not concentrated in a single, highly volatile industry like tech or crypto.
Conclusion
There is no reason for most of you to keep more than $250,000 in cash in your bank account or brokerage account. There are too many better places for that money to go. If anything were to happen to any good-size bank or brokerage firm, those assets would quickly get acquired by another (well-capitalized) financial institution in that space. Don’t panic the next time you hear a screaming headline about the next bank failure.
If you or someone close to you has concerns about the security of your bank or brokerage account, please don’t hesitate to reach out. We’re very experienced in this area and happy to help.
DAN SATZ MS, CFP® is a Wealth Manager at Novi Wealth