In light of the recent banking crises involving Silicon Valley Bank (SVB), Signature Bank, and the takeover of First Republic Bank by JPMorgan Chase, US policymakers have shown their commitment to “backstop” all deposits and created the Bank Term Funding Program (BTFP) to support vulnerable banks. These crises were likely due to a combination of factors, including insolvency and/or liquidity issues. With these developments in mind, we want to provide some perspective and insights on the protections in place for various bank accounts and investment accounts.
A bank fails when it does not have enough available cash to meet requested withdrawals or when it becomes insolvent. Back in 2021, many banks were flush with deposits. It is normal practice for banks to use deposits that have not been used to fund loans to purchase government bonds in efforts to boost earnings. The bank typically purchases these bonds with the intent to hold them to maturity so that they can get the full principal amount back and, over the term of the bond, collect interest. However, poor risk management surrounding the bonds held throughout the recent rising interest rate environment heavily contributed to the crises.
When interest rates go up, as we saw in 2022 and thus far in 2023, the value of a an existing bond goes down. If the bond is held to maturity, the fluctuating value of the bond over the term doesn’t matter; however, if the bond is sold prior to maturity, it will be sold at a discount. When depositers at SVB and Signature Bank wanted to withdraw their funds, the bank did not have enough liquid cash; it was invested in bonds that had gone down in the value. Once the bank sold the outstanding bonds (which they were forced to sell at a discount), the bank still did not have enough liquidity to meet depositer demands. That is when the government stepped in.
The Federal Deposit Insurance Corporation (FDIC) is a US government agency that provides insurance to depositors in case their bank fails. The FDIC covers up to $250,000 per depositor, per insured bank. That means if you have $250,000 or less in a bank account, your money is protected by the FDIC. FDIC insurance covers checking accounts, money market deposit accounts, and CDs. It does not cover money market funds as they are considered investment products.
So, what can you do to ensure that your money is protected?
- For cash you hold in the bank in checking accounts, savings accounts or CDs, be sure that your bank is FDIC-insured.
- If you have more than $250,000 in cash, diversify your deposits across multiple banks or accounts.
- For cash that you hold in your investment accounts, understand if it is held in a bank product or an investment product. For our clients, “cash” is held in money market deposit accounts at TD Ameritrade and those accounts are FDIC insured.
- Consider purchasing treasury bonds that are directly held to get the benefit of unlimited backing by the Federal government.
- Understand that investment accounts, that hold stocks, bonds and money market funds, are not FDIC insured, although they are protected by the SIPC (Securities Investor Protection Corporation) which protects against lost or missing assets, theft and unauthorized trading.
- Understand that investment accounts are covered by the SEC’s Customer Protection Rule which prevents firms from using customer assets and protects customer assets from the firm’s potential creditors’ claims.
At Core Wealth Management, we’re here to help you make informed financial decisions and that includes offering advice on how much cash you keep on-hand and where that cash is located. As a fiduciary wealth management firm, we also are consistently performing due diligence on the custodians and service providers we work with to provide confidence that your assets are held in a safe and secure manner.