The U.S. is facing a complicated economic future, with three recent bank failures occurring in a short period of time and an uncertain economy as proof. In particular, the Silicon Valley Bank’s collapse sent a rippling wave of fear to bank customers nationwide. Many began to question the safety of their hard-earned money in banks. In the wake of the SVB fallout, economic experts were quick to advise people not to panic or withdraw their money from U.S. banks. The government is also reassuring bank customers not to panic. However, there are a few actions customers can take to help ensure the safety of their money.
A little background: There are a combination of reasons why Silicon Valley Bank failed. In brief, per various analyses, the bank made itself dependent on the tech industry. High interest rates negatively affected tech companies and forced them to burn through cash. As a result, they pulled money out of SVB. Experts explain that the bank had invested in long-term treasuries and mortgage-backed securities that put them at risk when interest rates spiked. Thus, their assets barely covered their liabilities, forcing the bank to sell bonds at a loss. Investors panicked, which resulted in a run on the bank, with too many customers trying to withdraw money at the same time. Ultimately, the bank collapsed.
The U.S. government is working to reassure banking customers that everything is okay. They vow to backstop deposits of the failed banks to prevent a run on banks nationwide and to restore confidence in the American banking system. Despite the fallout, SVB depositors are being told that they will be paid back in full. They were also assured access to their money to fund their businesses. Considering what happened, people are wondering if there is a good way individuals may better protect their money. The answer is “yes.” Here are three main takeaways:
Takeaway # 1 – Use an FDIC insured bank. Being FDIC insured means that an account at a covered institution has the protection of the Federal Deposit Insurance Corporation, an independent agent of the U.S. government that underwrites most private bank deposits. In the case of a bank fail, depositors of an insured U.S. bank are protected against financial loss up to $250,000 per depositor, per insured bank, for each account ownership category. Some banks, particularly small to mid-sized ones, may not offer this protection, so it’s important to make sure that your bank is FDIC insured. Since most people have less than $250,000 in a bank account, their money will generally be safe at an insured bank. This includes checking and savings accounts, money market deposit accounts, retirement savings, cashier’s checks, and money orders. FDIC coverage excludes financial products to include stocks and bonds, mutual funds, crypto assets, life insurance policies, annuities, municipal securities, safe deposit boxes, U.S. Treasury bills, notes and bonds. One may determine if a bank is FDIC insured by visiting FDIC.GOV/BANKFIND or by calling 877-275-3342 (1-877-ASKFDIC)
Takeaway #2 – Diversify as needed. This means that people should spread their wealth to have all their money protected. One must take care not to exceed that $250,000 threshold at one single FDIC banking location. Individuals with more than $250,000 in deposits should consider banking at multiple FDIC locations. Or, alternatively to gain coverage, they may choose to put another $250,000 in their spouse’s name. Luckily, in the case of SVB and Signature Bank, federal regulators state they will cover up to the full amount rather than the typical $250,000 limit. However, this is an exception to the rule. They assure folks that it is not a taxpayer bailout, rather they expect insurance premiums to mainly cover costs. Regardless, before taking steps to diversify, it is best to seek the advice of a financial adviser who can explain the benefits and risks involved in those decisions.
Takeaway #3 – Pay attention to what banks are flagged. Fox Business is closely following what is happening in the banking industry and related economic conditions. Following the collapse, Moody’s Investment Services, a credit rating system, put several banks on review. Those banks are now perceived to be more risky investments by lenders. Moody is predicting harder times ahead for all US banks, and particularly for those with large amounts of uninsured deposits and long-term Treasury bonds that have decreased in value. Banks that hold high amounts of deposits above the FDIC limit are susceptible to large withdrawals from deposits. Smaller banks may be particularly hard hit. So, it’s important for people to pay attention to what’s happening and know which banks are in jeopardy.
Concerning the recent banking failures, and in the face of a troubled economy, people may experience financial panic. Experts caution that it is important for banking customers to remain calm. Though the banking crisis is fluid, they insist that most people’s money is generally safe. When making deposits, folks deserve peace of mind. Thankfully, FDIC deposit insurance enables customers to confidently place their money at thousands of FDIC insured banks across the country. Per the FDC, FDIC deposit insurance “…is backed by the full faith and credit of the United States government.” As the government works to address the banking crisis, individuals should confirm that they are doing business at a financially protected FDIC insured institution. Additionally, they should make sure that money above and beyond the FDIC threshold is otherwise protected or diversified. The latter involves spreading funds into different types of investments to mitigate risks. Finally, banking customers should stay alert and follow assessments of the banks to avoid doing business with those in jeopardy.
This article is purely informational, and data is subject to change. It is not intended as financial advice. As with any important financial decisions, contact a professional for guidance.