Banks in Distress: What You Need to Know About the Safety of Your MoneyGuest Post
In less than a week, the U.S. banking system has suffered two of the largest collapses in American history. Regulators shut down Silicon Valley Bank on Friday after customers rushed to withdraw their money as fears rose about the bank’s liquidity. Two days later, regulators shuttered Signature Bank following a similar run on deposits. (Disclosure: SmartAsset, the publisher of this article, has a customer relationship with Silicon Valley Bank.)
To prevent more bank runs, federal regulators quickly moved to insure all deposits at both banks – even accounts that exceeded the Federal Deposit Insurance Corporation’s insurance limit of $250,000. While the extraordinary action meant customers could take some comfort from the government intervention that effectively removed the cap on the FDIC’s insurance limit of $250,000, some banking stocks have plunged in recent days amid fears of ongoing instability. With that in mind, we’ve set out to answer some questions you might have about the safety of your money.
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What Is FDIC Insurance? Does It Only Apply to Savings Accounts?
Historically, FDIC insurance protected depositors up to $250,000 per bank per account ownership category in the event that an insured bank goes under. FDIC insurance covers money held in deposit accounts, including savings accounts, checking accounts, negotiable order of withdrawal (NOW) accounts, money market deposit accounts, certificates of deposit, cashier’s checks, money orders and other official items issued by a bank.
What Doesn’t FDIC Insurance Cover?
The FDIC does not protect investments, even if they were purchased through an insured bank. Stocks, bonds, mutual funds, life insurance policies, annuities and other investments are not covered by FDIC insurance.
While insurance companies that sell annuities aren’t FDIC-insured, it’s worth noting that annuities are protected in a different way. Each state has a nonprofit guaranty organization that insurance companies must join. If a member company fails, the other companies in the guaranty association help pay the outstanding claims.
Meanwhile, the Securities Investor Protection Corporation (SIPC) protects customer assets in the event that a brokerage shuts down. SIPC insurance covers up to $500,000 in assets per customer per institution.
Should I Limit My Deposits to $250,000 Per Bank?
Historically, limiting your deposits to $250,000 per bank per deposit category ensures that your money is protected in the event that the bank fails, assuming it’s FDIC-insured. While federal regulators stepped in and guaranteed all deposits at SVB and Signature Bank – even those over the $250,000 limit – it remains a bit unclear as to how far and how long the uncapped guarantee on deposits will extend.
Keep in mind that you may be eligible for more than $250,000 in total FDIC protection at a single bank. That’s because the FDIC’s insurance cap applies separately to eight different account ownership categories:
- Single accounts owned by one person
- Joint accounts owned by two or more people ($250,000 per person)
- Certain retirement accounts, including IRAs ($250,000 total)
- Revocable trust accounts ($250,000 per unique beneficiary)
- Irrevocable trust accounts ($250,000 for the noncontingent interest of each unique beneficiary)
- Corporation, partnership and unincorporated association accounts ($250,000 per entity)
- Employee benefit plan accounts ($250,000 per plan participant)
- Government accounts ($250,000 per official custodian)
For example, say you have $250,000 in a single account but you’re also co-owner of a $500,000 jointly held account with your spouse. Both accounts are held at the same bank. The FDIC would insure the $250,000 in your single account and provide $250,000 in protection to each co-owner of the joint account. As a result, all $500,000 of your money, plus $250,000 of your spouse’s cut, at this particular bank would be covered by the FDIC.
On the other hand, money held across multiple account types within a single account category are added up when determining whether you’re over the insured limit. For instance, if you’re a single account holder at a bank and you have $150,000 in a CD, $100,000 in a savings account and $50,000 in a checking account, you’d have a total of $300,000 in total deposits in the single account category at that bank. Were the bank to fail, only $250,000 of that $300,000 would be insured by the FDIC.
Are Credit Unions FDIC-insured?
Credit unions aren’t insured by the FDIC, but they are covered by the National Credit Union Administration (NCUA). This federal agency offers similar protections as the FDIC, but for credit unions. The NCUA insures up to $250,000 per person per account category at member credit unions.
How Are Bank Stocks Affected By the Recent Collapses?
It’s been a rough few days on Wall Street for the banking sector. Shares of regional banks, including First Republic, have plummeted in recent days and institutions with a high percentage of uninsured deposits are potentially vulnerable.
But federal regulators have rolled out a new program to lend money to banks that need capital to cover withdrawals from deposit accounts. The initiative, called the Bank Term Funding Program, will offer loans of up to one year in length to banks and other depository institutions, pledging U.S. Treasuries, agency debt and mortgage-backed securities as collateral.
While large U.S.-based banks appear to remain on solid footing, shares of Swiss bank Credit Suisse fell by as much as 30% at one point Wednesday, escalating fears that the banking turmoil could spill into Europe. Credit Suisse disclosed “material weaknesses” on Tuesday in Securities and Exchange Commission (SEC) filings, which also listed approximately $8 billion in net losses in 2022, according to CBS News. But the bank’s shares rebounded Thursday after the Swiss central bank announced it would loan Credit Suisse $54 billion to reassure depositors their money is safe.
What Does This All Mean for Federal Reserve Interest Rate Hikes?
This remains unclear. On March 7, Federal Reserve Chair Jerome Powell told a Senate committee that more aggressive interest rate hikes may be needed to tame inflation. But that was before the collapse of SVB and Signature Bank.
The Federal Reserve’s Federal Open Market Committee, which is responsible for adjusting interest rates, is scheduled to meet on March 21 and March 22. We’ll find out then whether the Fed plans to intensify its interest rate hikes, raise them marginally or hit pause on the inflation fight amid the current turmoil.
Are My Retirement Accounts Safe?
That depends on the type of retirement accounts you have and the assets held within those accounts. As mentioned above, FDIC insurance does cover certain retirement accounts, including IRAs, kept at insured banks. But the insurance only covers deposits held within those retirement accounts, not investments.
Let’s imagine you have $1 million in an IRA at an insured bank and 70% percent of the money is invested in various exchange-traded funds (ETFs). This portion of your IRA wouldn’t be covered by FDIC insurance. The remaining 30%, however, is held in CDs within the IRA. FDIC insurance would cover up to $250,000 of this money, although the remaining $50,000 would go uninsured.
What Are Some Low-Risk Investments Right Now?
All investing carries some rest, but if the recent banking crisis has you seeking safe havens for your money, there are various lower-credit risk investment options you may consider outside FDIC-insured deposit accounts:
Treasurys: Government-backed securities are considered to be some of the safest fixed-income investments out here. There are three different types of Treasurys, all of which offer varying yields and maturities.
- Treasury Bonds. Also known as T-bonds or long bonds, these have the longest maturity period of any other U.S. government securities. As a result, they typically pay out the most interest. But recent rate hikes from the Federal Reserve have pushed the price of existing T-bonds downward. After purchasing a T-bond, you’ll collect a fixed interest payment every six months.
- Treasury Notes. T-notes are like T-bonds but have a maturity of two to 10 years and traditionally offer lower yields.
- Treasury Bills. T-bills have the shortest duration of the three varieties. T-bills are issued with maturity dates of four, eight, 13, 26, or 52 weeks. And unlike the other two investments, T-bills do not extend interest payments to the investor because the maturity periods are so short.
Series I Savings Bond: Treasuries aren’t the only fixed-income investments that can offer safety. Series I savings bonds, which are also issued by the Treasury Department, are designed to help investors keep pace with inflation. They range in duration, from one year to 30 years, and earn interest every six months. While Series I savings bonds pay a fixed interest rate that’s set at the time of purchase, they’re also inflation adjusted. This means the Treasury Department pays an additional interest rate applied twice per year (in May and November) based on an estimated rate of inflation.
Gold: Seen as a reliable store of value, investors often turn to gold during times of financial crisis, inflation or recession. There are a number of ways to increase your exposure to gold, which include investing in physical gold bullion, buying shares of gold stocks or simply investing in an ETF that focuses on gold.
In the wake of the Silicon Valley Bank imbroglio, fear of crisis contagion within the banking sector has grown. Bank customers can rest assured, though, that FDIC insurance protects depositors up to $250,000 per bank per account ownership category in the event that an insured bank goes under.
For those worried about their investments, the FDIC does not cover customer assets if a brokerage shuts down, something that falls instead under the purview of the Securities Investor Protection Corporation (SIPC). For those concerned about their retirement nest eggs, the FDIC does cover certain retirement accounts, including IRAs, kept at insured banks. But the insurance only covers deposits held within those retirement accounts, not investments. And while bank stocks have taken it on the chin, there are investments that are generally considered to have less credit risk in this environment such as Treasury notes, bonds and bills — as well as Series I savings bonds.
Tips for Navigating the Current Crisis
- The insight and expertise that a financial advisor can be all the more valuable during times of economic uncertainty. A fiduciary advisor can address your concerns and answer the pressing questions that you may have. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Recent banking collapses highlight the importance of FDIC insurance. If you’re unsure whether your depository institution is insured, look for the FDIC sign at your bank, ask a representative or use the FDIC’s BankFind tool. This platform gives you access to detailed information about all FDIC-insured institutions, the current operating status of your bank and the bank’s regulator.
- If you need to update your portfolio’s holdings to better align it with your risk tolerance, give our asset allocation calculator a try. The tool helps determine how your assets should be spread across stocks, bonds and cash based on your risk tolerance.
Article by Patrick Villanova, CEPF®, Smart Asset.