How to Protect Your Bank Deposits

With Silicon Valley and Signature Bank failing during the past week, many savers are concerned about their bank deposits. Are your banks at risk of failing? What happens to your money in the event of a bank collapse?

It may help to better understand the reasons behind the recent bank failures. For starters, Silicon Valley Bank faced a number of issues: an undiversified portfolio, a high rate of uninsured deposits, and a bank run. Silicon Valley Bank primarily invested its assets in U.S. bonds. While U.S. bonds are considered relatively safe investments, Silicon Valley Bank bought U.S. bonds when interest rates were low. As interest rates rose, the value of lower-rate bonds began to drop, forcing Silicon Valley Bank to sell bonds at a discount.

Many Silicon Valley Bank customers also faced higher risk, given the high percentage of customers with uninsured deposits. The Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 per depositor, per bank, per ownership category.  However, Silicon Valley Bank had one of the highest rates of uninsured deposits across the industry, with nearly 94% of their deposits being uninsured (i.e. above the $250,000 coverage maximum). As fear ramped up, Silicon Valley Bank customers made a run on the bank. Faced with a huge number of depositors asking for their funds, Silicon Valley Bank began to sell their U.S. bonds to raise capital. However, because the bonds were being sold at a steep discount, Silicon Valley Bank was unable to raise sufficient funds to repay depositors. As a result, the FDIC had to step in and take over the bank and has since guaranteed the value of all deposits, including those above the insurance coverage maximum.

The failure of Silicon Valley Bank created a domino effect. Customers at Signature Bank and First Republic Bank, which also had a high percentage of uninsured deposits, began to rapidly withdraw funds. The FDIC took over Signature Bank, guaranteeing all deposits, while larger banks deposited funds with First Republic Bank to stabilize it.

Investigations are underway to better understand the failure of these banks, but in the meantime, there are a few lessons we can learn about protecting our savings. These tips can help guarantee that your deposits will be insured by the FDIC, even in the event of a bank failure.

1. Avoid herd mentality. Bank runs create significant financial issues while also being preventable occurrences. In addition to other issues, the fear-driven bank runs have caused much of the financial turmoil we’ve seen recently. If we can work against a culture of fear, we might see fewer banks fail due to mass, catastrophic withdrawals.
2. Diversify the types of savings accounts that you hold at a single bank. You can open an individual account for each adult member of the household. The FDIC insures up to $250,000 per depositor, per bank, per ownership category. Accordingly, spouses or partners could each open their own individual accounts, insuring up to $250,000 in each individual account. Save in joint accounts to further increase insurance coverage. Each account holder on a joint account receives $250,000 in insurance coverage, meaning joint accounts with two owners could have a total of $500,000 in FDIC coverage. If an account has three owners, the coverage maximum would further increase to $750,000. You can additionally spread out your savings between retirement accounts and trusts. Under FDIC rules, Roth IRAs, IRAs, SEP IRAs, SIMPLE IRAs, and self-directed contribution plans fall under one ownership category. Accordingly, up to $250,000 of all retirement accounts held by one account holder at a single bank are insured. Irrevocable and revocable trusts are treated as separate ownership categories with their own rules as well.
3. Spread out your savings between multiple banks. While this option can be inconvenient, it could allow you to increase your FDIC insurance coverage. The FDIC insurance coverage limits apply per bank, meaning any holdings at one bank would not decrease your insurance coverage at another bank. You can make this process easier by using a service such as IntraFi. IntraFi spreads out large customer deposits across a network of financial institutions, which constitute about one-third of U.S. banks. If you want to spread out your deposits on your own, you can use the FDIC’s website to find federally-insured banks.
4. Hold some of your savings at brokerage firms. Brokerage firms, such as Fidelity, operate in a different manner than do banks. Banks take a certain portion of customer deposits and invest those deposits in different securities or ventures, such as real estate, so that the bank can earn money on those deposits until the customer needs their funds. Brokerage firms leave the funds in client accounts and instead earn money through trading fees, mutual funds, commissions, ect. Brokerage funds are insured by the Securities Investor Protection Corporation (SIPC). SIPC doesn’t protect against the decline in the account’s value due to market movement or other factors. However, SIPC does insure the value of a brokerage account, up to a certain amount, in the event the brokerage firm faces liquidation.

If you have any questions about the security of your savings, do not hesitate to reach out to our experienced financial planning team for support.