Bank Failures & Keeping Your Assets Protected

Coming off of 3 recent bank failures (Silicon Valley Bank (SVB), Signature & Silvergate) and with other bank worries on their heels, I wanted to offer some comments on the implications and how to ensure your assets stay protected.

Reassurance

First of all, there are a number of reassurances out there.

• The US government will make depositors whole for all 3 banks that have failed.

• These banks were all relatively unique banks with riskier exposures. These weren’t banks focused on retail customers.
  • Signature and Silvergate had significant exposure to the cryptocurrency industry. When FTX went bankrupt, these banks experienced a high level of withdrawals and it put stress on the banks.
  • SVB (Silicon Valley Bank) had significant exposure to start up, venture capital businesses. As these businesses struggled and weren’t able to raise capital, they withdrew larger amounts from the bank, which put stress on SVB.
  • These banks also had some higher operational risks since their customer bases were concentrated and they were invested in assets that had a higher exposure to interest rate risk.

It is certainly an un-easy feeling to think about banks failing, but the uniqueness of these banks and the additional government support should offer some comfort.

Plan for the worst, hope for the best

This is though a good reminder that crazy things do happen.

Although it might seem like the government bails out every bank failure, that is a dangerous assumption.

As recently as 2019, the Enloe State Bank in Texas failed and depositors did lose money. In the 1980s and 1990s, several large savings and loan associations failed and depositors lost money. Other countries have experienced bank failures in which depositors have lost money as well.

This isn’t to scare you too much, but we shouldn’t neglect asset protection. Or what seem to be unlikely scenarios.

Bank failures, wars, pandemics and scenarios that seem unlikely, will continue to happen. And it’s often the events we don’t think about much, like banks failing, that can be the most devastating to financial security. Rare, yes, but they do happen.

If we take a step back though, we can see that our economy and diversified portfolios have held up through a lot before. And there are ways that we can plan ahead and protect ourselves from these risks.

I have some key considerations for cash protection summarized below.

And another article on portfolio considerations, through the link here.

Government Protection – High Level

To start, a foundational level of protection is provided to depositors through 3 different agencies of the US government. The FDIC is probably the most well-known, covering standard bank accounts, but there is also the NCUA for credit unions and the SIPC for brokerage accounts.

If you have a pension and are wondering, there is also the PBGC (pension benefit guaranty corporation) protecting the majority of pensions. And cash balances for life insurance policies are protected by state guaranty associations. The coverages here vary by state.

All 3 agencies initially mentioned (FDIC, NCUA & SIPC) cover $250,000 of cash deposits, per individual with some additional nuances that I’ll get into, but this brings me to my first recommendation:

• Make sure your bank, credit union or brokerage account is an FDIC, NCUA or SIPC member. Most are, but not all.

For many, this amount of coverage is sufficient, at least most of the time.

Even if you do typically carry a low cash balance though, it is still worthwhile to be familiar with how to keep your assets protected as cash balances can sneak up on people. And a bank failure isn’t always top of mind.

Imagine if you sell a home or business or receive an inheritance. Or if you’re preparing to buy a home, business or other large purchase, you would find yourself with more cash on hand than normal. Life happens and it’s good to plan ahead so you’re not worried or hearing about a bank run when it’s too late.

The good news is, there are several options to maximize your protection.

Beyond Initial Government Protections

I will expand on the government coverages in a bit, but the logistics to increase coverage there can be cumbersome. For a couple of “simple” options to increase your protection, consider the following:

• You can obtain “excess SIPC” coverage through your brokerage.
  • Brokerages can purchase “excess SIPC” coverage through private insurers. The details on how much coverage and if there are any additional costs will depend on your brokerage firm. Schwab for example offers excess SIPC for $1.15M of cash.

• If cash is invested, you own the securities that you invest in. Even if the brokerage institution goes under, you still own the securities and they would be transferred to another brokerage. For this treatment of a cash like investment, money market funds are a great option.

Money market funds (MMFs) are pooled investments (mutual funds, ETFs) that invest in short-term, high-quality debt securities, such as government bonds, certificates of deposit, commercial paper, and other short-term corporate debt.

No investment is without risk and due diligence should still be taken, but MMFs are a great way to spread risk among financial institutions. MMFs will diversify these short term cash products. And even if the brokerage your MMF is held at goes under, you still own the MMF security, which can transfer to another brokerage.

Note that money market funds are different than money market accounts. Money market accounts are cash accounts that are limited to the $250,000 of FDIC coverage.

Government Protection Details

While the items above may be simpler, they are both options for brokerage accounts and not bank/credit union accounts. To re-visit the details for the government protections offered, I have a few additional notes below.

• FDIC & NCUA offer $250,000/coverage per person, per account type. This is where things can get confusing/cumbersome to manage. A married couple though can obtain $1MM of coverage by having “mine, yours and ours” accounts.
  • The accounts that are separate for each spouse (the “mine and your” accounts) would each get $250,000 of FDIC/NCUA coverage. Then the joint account (“our account”) would get $500,000 of coverage as well ($250,000 of coverage for each spouse), totaling $1MM of coverage for the couple.
  • If this couple did the same thing at another bank/credit union, that would be $2MM of FDIC/NCUA coverage.
• Trusts are effective tools for FDIC/NCUA coverage as well. With trust accounts, you get additional coverage for each beneficiary listed. So let’s say you have a trust set up with 3 beneficiaries, you would get $1MM of coverage. And if your spouse does the same, that’s $2MM of coverage!

So there are ways to get a lot of coverage if it’s needed.

Nuances & Limitations

Before we conclude, we should review a few limitations and nuances:

• SIPC works similarly to FDIC/NCUA. You can “double dip” on coverage by having a different type of account (IRA, Roth IRA, Trust, Individual). SIPC is different though when it comes to a joint account as there is only $250,000 of cash coverage. As mentioned above, FDIC & NCUA cover $500,000 – $250k per person for a joint account.
• FDIC insurance does not cover safety deposit boxes.
• All 3 agencies cover non-US citizen deposits in US financial institutions. Coverage however does not extend to non-US financial institutions. So for Americans abroad, you will only get this coverage in your US based accounts.
• SIPC does not cover the following:
  • Commodity futures contracts
  • Currencies (US dollar cash is covered)
  • Investment contracts (such as limited partnerships)
  • Fixed annuity contracts (unless they are issued by a brokerage firm and backed by securities)

It is also worth noting for anyone that has international accounts, other countries offer similar types of governmental protections. These should be reviewed for the country that the accounts are held.

Conclusion

I hope this helps re-assure you on the security, or potential for more protection of your cash reserves. It may be a simple equation of, your cash is under the FDIC limit and you are squared away. But just know that there are options to protect your cash, if your reserve gets over these limits.

And of course planning ahead always makes things go smoother. Accounts and strategies can be set up accordingly for whatever your situation is.

.

Disclosures:

Commentary is provided only for informational purposes and should not be taken as investment advice. Commentary is general and investment advice should be unique to each individual. Please consult with a trusted advisor to receive advice specific to you.

Impact Financial, LLC (“Impact Financial”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Impact Financial and its representatives are properly licensed or exempt from licensure.