Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Thursday, March 23, 2023

Is your money safe?

With the collapse of Silicon Valley Bank and Signature Bank of New York in recent weeks, you may be wondering if your deposits at any bank are safe.

The short answer is probably yes.

In the wake of the collapse of those two banks, the Federal reserve, Treasury and FDIC came together with very strong support of depositors nationwide. Tighter regulation in the past decade has generally led to safer banks, but no bank could withstand the extraordinarily high level of withdrawals that SVB and Signature faced in their final days.

The past weeks brought two significant changes to support depositors:

The first thing that was done to support depositors was an expansion of FDIC insurance. FDIC insurance exists to ensure depositors that they will always have access to their money, even if their bank fails. The current limit of $250,000 per depositor, per FDIC-insured bank, per ownership category covers most individuals. What the crisis at SVB revealed was that companies that may keep millions in the bank are still at risk, and that puts their employees payroll and vendor payments at risk. FDIC extended insurance to all depositors in that case.

Will they do this again for your bank? Maybe so - Treasury Secretary Janet Yellen is very careful with her words, but does say they will provide similar support for other institutions when there is a risk of contagion. 

The second thing that was done to support depositors was an expansion of lending between the banks and the Federal reserve. Banks do not always have all of the cash they need to meet deposits on hand, so they sometimes borrow cash from other banks. Commonly, they use secured loans, posting high quality assets as collateral in exchange for the cash they need. The newly established Bank Term Lending Program offers more generous terms for banks to borrow from the Federal Reserve. The bank puts off Treasuries or other qualifying assets and receives cash to meet withdrawals.

Banks are in the business of managing risk mismatches. They must keep savings and checking accounts immediately accessible at all times with great surety. However, they make loans that are not due back immediately, or are to borrowers of less than certain credit. The Bank Term Lending Program is designed to help banks manage the maturity mismatch that has been exacerbated by the sharp rise in rates and corresponding decline in value of bonds.

We expect our banks to be safe, but risks still do exist. If your deposits exceed FDIC insurance limits, you may consider other cash-like investments like Treasuries. The IntraFi network also offers deposit swapping, allowing your bank to divide your deposit between other insured banks, without you having to go open accounts yourself.