Last Wednesday, Silicon Valley Bank, a west coast bank, had a market value of almost $16 billion. They had over $200 billion in assets and catered to tech startups, venture capitalists, and private equity funds. By Friday afternoon, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) had arrived to evaluate their financial stability, and by later that day, they had ceased operations. Companies and individuals scrambled in those last two days to get their money out of the bank. Many held deposits there far in excess of the $250,000 of coverage provided by the FDIC.
The reasons for the bank's failure are best left for another post, yet it is a good reminder that any bank, however apparently sound, is never guaranteed. Therefore, it also is a good time to evaluate your cash balances and ensure that you only have exposure within the FDIC coverage.
Let's look at what FDIC insurance is and what it covers, then let's look at some ways to extend coverage to mitigate risks of bank failure that the many depositors at Silicon Valley Bank are dealing with today.
What is the FDIC and what does FDIC insurance cover?
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government that provides deposit insurance to protect depositors in case their bank fails. Here's how FDIC insurance works:
- Coverage: FDIC insurance covers deposits at FDIC-insured banks and savings associations up to $250,000 per depositor, per insured bank, for each account ownership category. This means that if you have multiple accounts in different categories (such as individual accounts, joint accounts, and retirement accounts), you may be eligible for more than $250,000 in coverage at one bank.
- Eligibility: Most types of deposit accounts are covered by FDIC insurance, including checking accounts, savings accounts, money market deposit accounts, and certificates of deposit (CDs). However, not all financial products banks offer are insured by the FDIC, such as stocks, bonds, mutual funds, annuities, and life insurance policies.
- Protection: If your bank fails, the FDIC will step in and pay you the insured amount of your deposit, up to the coverage limit. This means that even if your bank goes bankrupt, you will not lose your insured deposits.
- Claims: If your bank fails, the FDIC will notify you by mail and provide instructions on how to file a claim for your insured deposits. In most cases, the FDIC will pay out insured deposits within a few business days after the bank fails.
- Financial Stability: The FDIC also helps maintain stability and public confidence in the U.S. financial system by monitoring and regulating banks and savings associations and providing financial and technical assistance to troubled institutions.
It's important to note that only your total deposit is insured. So, for example, if you had a $250,000 CD at a bank and it failed, you would receive only the $250,000, not any interest that accrued above that amount.
Therefore, keep your exposure less than $250,000 to preserve any accrued interest. If you would like to evaluate your own coverage of your accounts by the FDIC, they have a calculator available at https://edie.fdic.gov/calculator.html
How do I get additional coverage beyond the $250,000?
- Open accounts with different FDIC ownership categories: Let's say you have only $400,000 in checking savings in your name at a local bank. Since the FDIC limit is $250,000, $150,000 isn't insured because you are the only depositor. One way to ensure all your money is to open accounts with different ownership categories. For example, you could open a joint savings account with your spouse and be eligible for up to $500,000 in FDIC insurance because EACH account holder is insured up to $250,000.A complete list of ownership categories that the FDIC considers can be found here: https://www.fdic.gov/resources/deposit-insurance/financial-products-insured/
- Open accounts at several banks: You can easily insure your excess deposits by opening accounts at different banks to expand your FDIC coverage. However, opening accounts at different branches of the same bank will not increase your insurance.
- Consider brokerage accounts: Brokerage accounts typically offer Certificates of Deposit (CDs) from different banks across the country, giving you the convenience of one-stop shopping. You could spread a large cash position across as many banks as you wish. However, you need to consider how long the CD locks the money up and ensure you get the most competitive rates. We have done this for several clients over the past year.
- Deposit excess funds at a credit union: Credit unions are another good choice for excess cash that isn't FDIC-insured. The National Credit Union Share Insurance Fund (NCUSIF) is the federal insurer of deposits at National Credit Union Administration (NCUA) member credit unions. NCUA insurance, like FDIC insurance, is backed by the full faith and credit of the U.S. government. To open a deposit account, you have to become a credit union member, but membership requirements are often relatively lenient, extending to family and friends.
- Consider Money Market Mutual Funds: Though these aren't FDIC insured, they are fully liquid and are paying much more competitive rates since the Fed started raising rates in March 2021. They are held in your brokerage account and seek to maintain a value of $1 per share at all times. You can mitigate risk further by using funds that only invest in treasuries fully backed by the U.S. government, just like the FDIC.
What should I do?
With rising interest rates and stubborn inflation, monitoring your cash balances has been more critical than ever since the financial crisis in 2008 and 2009. The solution is unique to your situation and goals. We are available to discuss this and any other questions you might have. Please reach out to us if you would like to discuss this further.