Recently, there has been growing concern over the stability of our banking system. Particularly following the collapse of several banks, the two most notable being Silicon Valley Bank (SVB) and Signature Bank. So, what is happening with Silicon Valley Bank and other banks? Is this a sign that our banking system is on the brink of collapse? The answer is likely no and I hope this blog gives you clarity on what is happening with a handful of banks across the nation.
In very simple terms, SVB and Signature Bank have experienced massive growth over the past few years. This was caused by a boom in venture capital. These banks invested a disproportionate number of deposits in long-term bonds when interest rates were at generational lows. Longer-duration bonds are particularly sensitive to rising interest rates. As interest rates rose, the price of these bonds plummeted.
Once it was announced that these banks had lost billions on their balance sheets due to their own mismanagement, customers became nervous and withdrew their deposits. A “bank run” is when large numbers of customers concurrently withdraw their deposits over fears about solvency. The recent bank run occurred over the course of a few days. This resulted in several banks being seized by regulators.
The United States’ primary safeguard against “bank runs” is FDIC insurance which stands for Federal Deposit Insurance Corporation. FDIC insurance covers up to $250,000 per depositor, per bank, per account type. Regardless of the factors that led up to the collapse of these banks, we know that roughly 90% of deposits at SVB and Signature Bank exceeded the FDIC insurance coverage limit and were therefore uninsured. You may now have a better understanding why a bank run by larger depositors was justified.
The reality of our banking system
What is happening with Silicon Valley Bank and other bank failures happens more often than you might think. In fact, there have been 565 in the U.S. since 2000 which is an average of almost 25 per year. The collapse of SVB and Signature Bank are unique, notably due to their size. The Silicon Valley Bank and Signature Bank were amongst the largest banks in the country. So, the question is, will the failure of these banks lead to a systemic bank crisis? The answer is likely no.
Many reputable banks go above and beyond the regulatory requirements that are imposed upon them. This is to ensure that they have enough cash on hand for customer withdrawals. This was not the case for SVB and Signature Bank. Lessons learned during the financial crisis in 2008 led to additional safeguards and regulations. This left the banking system in a much stronger position to address liquidity concerns. The simple way to secure your own bank deposits is to limit your bank account balances to fit within FDIC insurance limits in case your bank fails.
What if I have over $250,000 at my bank and exceed the FDIC insurance?
If you have more than $250,000 in deposits, you may want to consider the following ways to protect your deposits:
- Open a new bank account at a different financial institution. There is no limitation on the number of banking relationships that you can have. The FDIC coverage is $250,000 per depositor, per bank, meaning that you will have $250,000 of coverage for every different banking relationship that you have.
- Add a joint owner. The FDIC coverage is also based on the type of account you have. For a single depositor, you will have up to $250,000 of coverage. But if you have a significant other, then adding your spouse gives you a total of $500,000.
- Open up a different registration type. A separate entity like a Trust or LLC account is also eligible for its own $250,000 of coverage.
- Join a credit union. Credit unions have a similar program to FDIC called NCUA which stands for the National Credit Union Administration. NCUA provides protection up to $250,000 per depositor, per account type just like FDIC. The main difference is that credit unions are not backed by the full faith and credit of the federal government.
- Revisit why you have that much money sitting in a bank and consider moving your cash to a brokerage account held at a large custodian like Charles Schwab, Vanguard, or Fidelity Investments etc. Although you are limited to $250,000 under FDIC, brokerage accounts are covered by a different type of insurance called SIPC. SIPC stands for ‘Securities Investor Protection Corporation’. If a custodian is in financial trouble, the SIPC serves as a backstop. SIPC generally covers up to $500,000 between cash and securities similar to how FDIC works. Many custodians like Charles Schwab have purchased SIPC coverage that exceeds these limits to fully protect the deposits of those that have millions of dollars invested at their firms.
What does the collapse of Silicon Valley Bank mean for me?
The FDIC insurance is an important safeguard that helps promote stability in the banking system and protects depositors’ hard-earned money. It’s good to be aware of FDIC insurance coverage limits. However, for the vast majority of deposits, bank defaults don’t pose a risk because most depositors don’t have deposits that exceed FDIC insurance protection. So, you might ask, “why did I write this blog?”
I wrote this blog to reassure our investors that what is happening with Silicon Valley Bank and other recently mismanaged banks is not the beginning of a collapse in the banking system. Unforeseen events like this happen. These events cannot be accurately predicted or prevented. Every investment has potential risks as well as potential rewards. That is precisely why FDIC insurance for cash and a well-thought-out investment plan like the Perennial Income Model™ go a long way toward mitigating risks for investors.
History has taught us that our financial systems do a good job of protecting our money. Volatility is the norm and even though we experience periods of short-term volatility, the economy has proven to be quite resilient. This too shall pass.