Is Your Money Safe?

If you were a working adult during the 2008 financial crisis, you may be feeling some deja vu as some well-known and seemingly stable banks have found themselves collapsing or on the verge of collapsing. What does this mean for you and your bank accounts? Should you be worried?

In this blog, I break down what happened and why you don't need to run to the nearest ATM, withdraw everything, and hide it under your mattress. This is not the Great Depression of 1929 or even a 2008 event.

What Happened?

As of December 31, 2022, Silicon Valley Bank (SVB) had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. No small potato! However, due to some poor investment choices, on March 12, 2023, it was closed and transferred to the FDIC (Federal Deposit Insurance Corporation). More on the FDIC later...

SVB was a commercial bank that loaned money to high net worth entrepreneurs and investors. It was not a bank for the ordinary retail consumer, such as you and me. In a nutshell, they mismanaged their assets. They had a lot of money invested in long-term bonds. As the Federal Reserve continued to raise interest rates (to no one’s surprise!), the value of those bonds fell, causing their balance sheet to look a bit scary. Once investors got wind that there could be a liquidity problem, a panic ensued and they started pulling their money out. This is called a “bank run” and it created a ripple effect with a few other banks also finding themselves in hot water. The good news is, other major banks are stepping in to help those on the verge of a similar fate.

FDIC

Back to the FDIC. You’ve probably heard of it? This is insurance that was instituted during the Great Depression when the stock market collapsed and everyone lost their money. Why? Prior to 1933, there was no protection for consumer bank deposits. You just hoped and prayed that the bank was stable and when you withdrew your money, it was there.

Nearly all banks now carry FDIC insurance and it protects eligible accounts up to $250,000. This means that if the bank fails, they are required to reimburse you up to the amount you deposited, but no more than $250,000. Keep in mind, it does not insure all types of accounts, but does include the most common, including checking, savings, and CDs.

Retirement accounts (IRAs), money market funds, stocks, bonds, and insurance products are not covered by the FDIC. Investments are covered under the Securities Investor Protection Corporation (SIPC: https://www.sipc.org). Also, FDIC coverage applies to each owner. For example, if you have $50k in a checking account and $100k in a savings account, you are within the $250,000 limit. If, however, you have $100k in a checking account and $200k spread amongst 10 CDs, you are $50k above the limit and in essence, putting the additional money at risk if a bank default were to occur.

Managing Risk

If you are still worried, there are a few ways you can protect yourself and none of them include hiding it under the mattress:

• Spread the love to other banks. If you can manage it, spread your accounts among multiple banks so you remain well within the FDIC limits.

• Retitle some accounts in the name of a spouse, a trust, or other legal entity.

• Put a portion into U.S. Treasury Bills, which are backed by the full faith of the federal government (higher protection than the FDIC). Keep in mind, however, that T-Bills are not as liquid (able to easily withdraw the money) as checking or savings accounts. CD’s also fall under the illiquid category due to their penalties for early withdrawal.

Stay the Course

It is worth repeating that if you are working with a financial planner or have a financial plan, continue down that path unless something drastic has happened in your situation that requires a re-review.

Overall, the banking system is healthy, but a few “bad eggs” can throw everyone’s confidence for a loop. This is perhaps because the 2008 financial crisis wasn’t really that long ago! Regardless, protections have been put in place for events like this and if you are unsure or have questions about where you are banking and want to ensure you are managing your risk appropriately, review your bank’s financial condition. The FDIC web site also has a lot of valuable information for the retail consumer: https://www.fdic.gov/resources/. Ask questions and do your due diligence, or with the help of a knowledgeable financial expert.