In this blog post , we are going take a departure from our real estate-oriented topics and cover an issue that concerns a growing number of our clients: protecting their bank deposits.
Despite assurances from some politicians and banking executives, many of our clients remain nervous over the safety of their bank deposits. Over the last several weeks we have continued to see signs of weakness in the banking sector – especially among smaller regional banks. After two years of no reported bank failures, the recent bankruptcy of First Republic Bank following failures at Silicon Valley Bank and Signature Bank has caused many of our clients to seek strategies to better protect their savings.1
We hope that you find the information in this blog to be helpful in developing your own personal strategies for reducing potential bank deposit risks.
What Caused the Recent Bank Failures?
To better understand potential risk factors, let’s first discuss what led to the recent bank failures.
Banks make money chiefly by attracting deposits so that they can then provide loans to borrowers which are made at generally higher interest rates than what is paid to the depositors. The spread between these rates is a main source of income to the bank.
Funds from depositors are used to make loans and banks are required to generally keep a portion of deposits available as reserves to provide funds to those clients who wish to make withdrawals. Most of the time this arrangement works well since most investors will not make large withdrawals if they believe their money is safe.
In March of 2023, Silicon Valley Bank announced a loss of about $2 billion causing many investors to rush to withdraw deposits (aka “bank run”) totaling $42 billion on the next day. The bank began to sell portions of its long-term bond holdings to raise cash, but the value of its long-term bonds had declined due to rising interest rates and losses were further exacerbated. In spite of the efforts, the bank was unable to meet the demand and was closed by regulators.
Loss of confidence by depositors triggered by Silicon Valley Bank then led to failures at Signature Bank and First Republic Bank.
These bank failures were the first to occur in the US since October 2020.
Protecting Your Deposits
Bank failures have occurred many times in US history and the government has stepped in with programs to protect depositors. The best known of these programs is the Federal Deposit Insurance Corporation which was created in 1934 and organized to provide insurance on bank deposits. The initial insurance covered deposits of up to $2,500 – but this limit was steadily raised over the years and now provides coverage for up to $250,000 per single account.2
Many of our clients have bank accounts totaling more than $250,000 and are justifiably concerned about losing their savings given recent headlines. Here is a summary of the most popular strategies used by our clients to protect their bank deposits.
Open Additional Accounts at Different Banks
Once a bank account reaches the $250,000 limit covered by the FDIC, many clients take steps to open additional bank accounts at different banks. Do your homework to make sure that the banks you select have solid financials and a long-term profitable track record. Ask if they are holding unrealized losses e.g., holding long-term bonds that have declined in value below their purchase price.
Opening a separate account at a different bank also can provide flexibility to quickly move funds from a troubled bank prior to a bank failure. Depositors at Silicon Valley Bank who had accounts at other banks were able to quickly move funds as soon as news of large initial loss became public while those depositors that did not have other accounts had no quick means to move funds and were stuck.
Create a Joint Account
The FDIC insurance limit of $250,000 can be increased to $500,000 if the account is jointly owned by two or more people. Use care in selecting a joint owner with whom you have a long-term trusted relationship e.g., spouse or close relative. Be aware that holders of joint accounts will have deposit and withdrawal privileges and will have access to the transaction history within the account.
Establish Different Types of Accounts
The FDIC will separately insure different types of accounts and allow up to the full insurance limit on each qualifying account type. Examples of non-individual accounts may include trusts, retirement accounts, partnership, and corporate accounts, among others. Check with a senior bank official to explore options that may be available to you.
Open an Insured Cash Sweep (ICS) Account
This can be an excellent option which combines not only the benefit of greater insurance coverage but also a means of generating potential interest on your funds. A growing number of banks offer this type of account which can increase FDIC coverage from $250,000 to up to $125 million.
Deposits greater than $250,000 are automatically placed or swept into multiple participating banks daily thereby compounding FDIC insurance coverage. Interest is generally paid on the deposited funds ranging currently up to 4% or even higher depending in part on the size of the deposits among other factors.3
The bank offering this option will manage the process and the depositor will generally not incur additional responsibilities beyond opening the account and paying taxes on the earned interest.
Convert Excess Cash into Short Term Treasury Bills or CDs
Many of our clients are converting excess cash above what they determine to need as emergency funds into short-term treasury bills or CDs.
US treasury bills are backed by the full faith and credit of the United States and are deemed to be among the safest investment options available. While the value of a treasure bill can fluctuate over the holding period due to changes in interest rates, investors are guaranteed to receive their full principal plus accrued interest on the maturity date of the T-bill.
Certificates of Deposit or CDs are insured by the FDIC up to $250,000 and may be another option worth exploring.
For example, if a husband and wife have a joint account with FDIC coverage up to $500,000, they could each individually invest excess funds of up to $500,000 into two CDs and obtain FDIC coverage totaling $1,000,000 ($500,00 for their joint account plus $250,00 for each of their individual CDs).
Bottomline
The FGG1031/First Guardian Group team strives to provide peace of mind to our clients through offering suitable investment options as well ongoing financial advice and referrals to other finance specialists as needed.
Please contact us not only with your questions on real estate investments, 1031 exchanges, and DSTs – but also with any general concerns or financial options that you may be considering. If we don’t have the answers, we’ll do our best to refer you to others who may.
1 https://www.fdic.gov/bank/historical/bank/bfb2020.html
2 https://americandeposits.com/history-and-timeline-of-changes-to-fdic-coverage-limits/
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