So, in the past few days, two banks have failed – should you worry about the bank collapse? Not really, and let me tell you why.
How Does The SVB Collapse Affect You?
Yes, Silicon Valley Bank and Signature Bank both collapsed. However, that won’t affect most of us directly and the government has already stepped in to help depositors at those banks get access to their funds and prevent a catastrophic bank run.
Silicon Valley’s customers are mostly venture capitalists and small to medium-sized companies – not individuals. In the past few weeks, SVB rebalanced some investments, which led to recognizing some losses. Some of the venture capitalists who have funds in that bank got concerned about the bank’s liquidity. Simultaneously, they encouraged their clients to move their money from SVB. This started to create a bank run. The bank run exacerbated SVB’s liquidity issues and drew the attention of the federal regulators. Those regulators then quickly stepped in to prevent an implosion that could result in bank runs at more banks.
What Is The FDIC Doing?
Many of the SVB depositors have more than $250,000 in the bank, and they employ many people. They appealed to Congress, stating that if the bank failed and they were only reimbursed $250,000 (the amount of FDIC insurance), businesses would not be able to make payroll. Without payroll, people would lose jobs. The government decided to use the FDIC insurance fund to cover the total account balances for all depositors, lifting the $250,000 limit for both Silicon Valley Bank and Signature Bank customers.
“Americans can rest assured that our banking system is safe, your deposits are safe”
President Joe Biden
President Biden acknowledges this is not a bailout like back in 2008 and that no tax dollars would be used to pay depositors. He is right, in a way. No tax dollars will be used directly, but banks have to make the FDIC insurance fund whole again. Banks are for-profit institutions and will likely pass on these costs to their customers in the form of fees and interest rate adjustments. So, average citizens will still probably pay for this … but not through their taxes.
The swift actions taken by the President should give SVB and Signature Bank customers easy access to their money – likely they can already access it – and most importantly give depositors at all banks confidence that their money is safe.
The President clearly stated that only depositors would be made whole by the FDIC insurance funds, not stockholders of the bank and (likely) not the bondholders who knowingly took risks with their investments.
Wait, What’s The FDIC?
So, let me return to the Federal Deposit Insurance Corporation or FDIC insurance. Here are the basics. FDIC Insurance provides $250,000 of protection to each person, individually, and each company in the case of a bank failure. Covered products include savings, checking, and CDs. This insurance does NOT cover stocks, bonds, mutual funds, commodities, or crypto, all which vary with the market. Banks pay for the insurance fund, which has been used very effectively many times before when covered banks became insolvent.
How Can I Protect My Money?
So, how do you protect your money from a bank collapse? First, put your money only in a bank that is FDIC-insured. It can be online, brick and mortar, regional, or national – just make sure it is FDIC insured.
Second, if you have more than $250,000 on deposit – and that’s not crazy to think about, because you may have just sold your home or business and have the proceeds parked in a bank account while you make your next move – so if you have more than $250,000 on deposit in one bank, simply divide it between more than one bank keeping each bank’s total below $250,000 per person. Just because the administration is raising the FDIC insurance cap for these two banks is no guarantee that they will – or even can – for any future banks. So, protect yourself and your hard-earned savings.
Personally, I use a credit union. The National Credit Union Share Insurance Fund protects all deposits at federally-insured credit unions, up to the same limit of $250,000 per individual depositor.
What Is The Money Teacher Doing With Her Money?
Nothing. Same as last week, last month, and last year. I have a long-term investing strategy that I revisit and revise each year. I refuse to act out of fear or greed with my money or anything else. I suggest you take the same approach – unless you have more than $250,000 in one bank, in which case you should really think about spreading it out among enough banks to get it below the FDIC Insurance limit.