With the recent failures of Silicon Valley Bank and Signature Bank, many people have been asking questions about our banking system and the protections provided should a bank fail. Here are some of the questions I’ve been answering for clients:
Is my money safe in the bank?
With the collapse of Silicon Valley Bank and others, people are asking me if their money is safe in the bank. The short answer is, yes…to the extent that it is protected by the Federal Deposit Insurance Corporation (FDIC).
This is something that we should always be asking ourselves and thinking about, but it’s human nature not to…until a crisis presents itself.
What is the FDIC?
The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by Congress to maintain stability and public confidence in the nation's financial system. To accomplish this mission, the FDIC insures deposits; examines and supervises financial institutions for safety, soundness, and consumer protection; makes large and complex financial institutions resolvable; and manages receiverships.
Since its creation in 1933, the FDIC has been an essential part of the American financial system. In the 1920s and early 1930s, a rise in bank failures created a national crisis, wiping out many Americans’ savings. Since FDIC insurance began in 1934, no depositor has lost a single penny of insured funds due to bank failure.
What is insured by the FDIC?
The FDIC covers:
- Checking accounts
- Negotiable Order of Withdrawal (NOW) accounts
- Savings accounts
- Money Market Deposit Accounts (MMDAs)
- Time deposits such as certificates of deposit (CDs)
- Cashier's checks, money orders, and other official items issued by a bank
The FDIC does not cover:
- Stock investments
- Bond investments
- Mutual funds
- Crypto Assets
- Life insurance policies
- Municipal securities
- Safe deposit boxes or their contents
- U.S. Treasury bills, bonds or notes*
*These investments are backed by the full faith and credit of the U.S. government.
How much of my money is protected?
The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.
Ownership categories include: single accounts, joint accounts, certain retirement accounts, revocable trust accounts, etc. (see fdic.gov for additional details)
As an example, a married couple could have up to $1,000,000 of protection at a single bank if they each had individual accounts in their own name with $250,000 each as well as a joint account with $500,000. Because of the differing ownership categories, each account is covered.
But, if you have two accounts in your own name (e.g. one checking and one savings) with $250,000 each, the total of the two would be added together and you get $250,000 total protection with the “single account ownership category.”
What would cause my bank to fail? What’s my risk?
When a bank is unable to meet it’s obligations to depositors or others, the bank fails. This could be the result of a “run on the bank” as we recently saw with Silicon Valley Bank. The bank does not keep all deposits on hand – they lend the funds that are deposited to facilitate commerce and generate a profit for the shareholders of the bank.
As a result, the bank is not able to return all deposits to their customers at the same time, because they generally only maintain liquidity that is required by regulators.
Bank failure is not common, but more possible during times of crisis. With Silicon Valley Bank, for example, the investment they put deposits into were declining in value due to the rapid increase in the Fed Funds Rate, which put them in a position where their liabilities (their deposits) were greater than their assets (their loans, bonds, and other investments, etc.)
Imagine you bought your house in 2007 for $500,000. You put $100,000 and got a 30 year mortgage for $400,000. Even though two years later your house might only be worth $300,000 and you still owe $385,000 you can still afford the payments and have confidence that your home’s value will ultimately rebound even though it’s temporarily down due to market conditions.
This works unless your mortgage lender suddenly demanded all of the money from you now. While you may have been able to provide the “liquidity” over time (aka your mortgage payments), a demand that it all be due immediately may cause you to “fail”/have to foreclose.
This is essentially what happened recently, and is one of the ways a bank can fail.
Do I need to do anything differently?
If you unsure if you are covered, talk to a professional to get advice about the best way to protect your assets.