Last week, Silicon Valley Bank became the second of three notable banks to collapse in short order.
It took about 48 hours for a popular bank with about $300 billion in assets and seemingly conservative practices to vanish.
SVB held a huge portion of its assets in bonds with major exposure to increasing interest rates. Essentially, its risk management department was counting on the Federal Reserve to halt interest rate hikes this year.
When that didn’t happen, it sparked a bank run at SVB, one of the 20 largest institutions in the United States. It had to rapid-sell its assets in a desperate (and failed) attempt to avoid running out of cash.
In turn, one of the most significant banks for software startups failed and threatened the security of other banks. The sudden collapse sparked a crisis of confidence among some Americans.
Remember, it wasn’t long ago that bank failures at the highest levels caused the Great Recession in 2007.
The government stepped in prior to the start of this week to bolster the banking system in a move that money expert Clark Howard applauded. But can you rest easy at night with your money on deposit at even the best banks in the United States?
That's what listeners of the Clark Howard Podcast recently asked.
Should I Move My Money From My Bank Account?
The short answer is no. Your money in your FDIC-insured bank is not at risk. Especially if you have less than $250,000 in your account.
The word contagion applies to infectious diseases such as COVID-19. It also aptly describes what often happens in the world of finance when a major link in the chain fails.
Financial institutions often lend each other money or invest in each other. Even modest business dealings among these companies can include large sums of money.
If one company evaporates, it can impact any institution that was doing business with it at the time. Then there’s a ripple effect, as companies doing business with that secondary institution can feel the impact as well.
Confidence is crucial when it comes to the United States banking system. A negative event can cause panic (sometimes logical, sometimes not).
Is it smart to take your money out of your bank right now to protect it? That's what several podcast listeners wanted to know on the special edition March 13 podcast episode.
Asked Sydney in Florida: "Do I need to be worried about having my money at Ally Bank? I have a CD and a savings account. I just read an article outlining 10 banks with unfavorable interest margins. Ally was on the list. They were also on the list for banks with the highest AOCI: Accumulated Other Comprehensive Income.
"You recommend them. Do you think people need to be concerned or worried enough to move their money elsewhere?"
In this case, Sydney asked about Ally Bank. But based on the questions Team Clark has received about the SVB collapse, it could be any bank.
The major question, Clark says, is whether your balance with any bank is greater than the $250,000 that the FDIC insures.
“Individuals should never have more than $250,000 in any one institution. Trust that you can keep less than $250,000 in [an FDIC-insured bank],” Clark says. “The $250,000 FDIC insurance means you’re A-OK and you’re safe … as long as we remember to stay below $250,000.”
How the Federal Government Is Backstopping Silicon Valley Bank and All Bank Balances
The United States made a couple of major moves to secure the banking system and restore the confidence of the American people this week.
First, the Treasury Department designated SVB and Signature Bank, which also failed Sunday, as systematic risks. That means that the FDIC will cover all depositors, not just those with a balance of less than $250,000.
In addition to that, the Federal Reserve is creating a Bank Term Funding Program. The program, meant to be temporary, will rely on the biggest banks to safeguard institutions that could get caught by a ripple effect. The idea is that they'd each contribute to any failing institution an amount equal to their market share.
“The Feds drew on a law that was passed after all the bank failures that hastened and deepened the Great Depression through the 1930s. They are guaranteeing the deposits past FDIC insurance for an undetermined period of time for all the banks in the United States,” Clark says. “So, you can rest easy [for now] if you have more than FDIC limits.
“The whole idea is to maintain faith in the banking business because there is zero doubt that this week would’ve led to a number of bank runs by their largest account holders, businesses and some individuals who had so much potentially to lose with money on hand beyond FDIC insurance.”
Why the Current Bank Failures Are Nothing Like the Great Recession
Congress increased the FDIC per-depositor insurance limit from $100,000 to $250,000 in 2008.
If the amount got pegged to inflation, it would now be about $437,500 according to Clark.
However, a whopping 93% of deposits at SVB were uninsured.
The biggest potential losers in the SVB collapse were businesses. Many businesses keep balances well more than the FDIC-insured $250,000. They need the money to make payroll, pay taxes and more.
The U.S. government protected those businesses (and their employees) by backstopping SVB.
Some people are comparing what’s happening to 2007-09. That’s a mistake, Clark says.
“The failures one after another [during that period]. The bailouts of the banks. Nobody going to prison. I mean, it was unbelievable. There was so much financial skullduggery. Wrongdoing by the banks. And they got away with it,” Clark says.
“There’s so much resentment among people from that time, from that era. But this is completely different. There’s not even a scintilla of similarity between the bank failures of the last couple days.
“And that’s why the federal agencies felt they had to provide this blanket backstop of all bank deposits when banks reopen in just a few hours Monday morning. The good news is some gutsy people made decisions that I think were the right thing to do to restore faith in the banking system.”
Clark also mentioned that, at present, taxpayers will not have to bear any of the burdens of backstopping these failed banks.
What Can You Do To Protect More Than $250,000 at a Single Bank?
Let’s say that you have a balance of more than $250,000 at an individual bank. In other words, at least some of your money is not protected by FDIC insurance. What do you do?
The backstop that the federal government is providing for your money is supposed to be temporary.
So, in the long-term, you should spread your money across multiple banks. But the more money you have, the more challenging that can be.
Another solution? Turn to IntraFi Network, formerly the Certificate of Deposit Account Registry Service, Clark says.
“You can go to one participating institution and put in as much money as you want. They spread it out for you through your one account number to a variety of FDIC-insured institutions, so you have essentially unlimited FDIC insurance,” Clark says.
“And that’s why the program has long been a respected way for people who have the good fortune of having large amounts of money.”
As an individual, you shouldn’t keep more than $250,000 in a single bank account. The FDIC only insures up to $250,000 in deposits.
However, the federal government acted swiftly this week in an attempt to prevent further bank runs and failures. It took over SVB and will unwind its assets slowly to avoid a huge cash deficit. It also enacted an old law to temporarily guard against a collapse by spreading the risk across all United States banks to protect one another.
There’s no need to panic and put all your money into gold. Just make sure you’re following safe practices with your bank accounts.
Do you feel like your money is safe? Join the conversation about the current banking market in our Clark.com Community!
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Credit: HYOSUB SHIN / AJC