Is My Money Safe in the Bank?Mar 30, 2023
I've been hearing a lot of questions about the safety of the banking system in the US so I thought we could talk about it today.
As you know, there have been three bank failures in March.
- The first bank to fail was Silvergate on March 8, 2023. Silvergate was severely damaged by the FTX collapse as it was one of the first banks that utilized cryptocurrency.
- The second bank to fail was Silicon Valley Bank on March 10, 2023.
- The third bank to fail was Signature Bank on March 13, 2023.
How did this happen?
- Silvergate was a unusual as it's failure was tied to the cryptocurrency market and the collapse of FTX ( a cryptocurrency exchange).
- Silicon Valley Bank was the 16th largest bank in the US with $209 billion in assets.
- Signature Bank was also a well respected bank originally founded in 2001 and had $110 billion in assets.
So what happened?
The US banking system is a "fractional reserve banking system". This means that only a percentage of the money deposited in the bank is "reserved" as "cash" in the bank. Typically, a healthy bank will have between 15-20% of "cash" on hand for withdrawals by their customers. The rest of the money is used for loans like mortgages, auto loans, credit cards, business loans etc. Some of the money will be kept as long term assets like bonds as well. Do you remember the Christmas movie "It's a Wonderful Life"? There was a run on George Bailey's bank and he explained to his customers that their money was in "Joe's house and the Kennedy house". That was a really good description of our banking system!
- Silicon Valley Bank had realized, due to the rapidly increasing interest rates, that their assets weren't worth as much anymore. So, SVB decided to raise some money by selling additional stock in their company. The idea that SVB needed money scared their customers and the bank run was on. Obviously, since they only has 15% of the deposits as cash, SVB couldn't possibly give everyone back their money that fast. The FDIC (Federal Deposit Insurance Corporation) stepped in and closed the bank.
- After the fall of SVB, everyone started to be concerned about the smaller US regional banks. Americans started withdrawing their money and the next bank run happened to Signature Bank which was closed by the FDIC March 13, 2023.
The FDIC has been working on calming everyone's fear about the banking system. Rather than only covering the bank customers to the insured limit of $250,000, they are covering ALL the money people had in the banks. Knowing you will get your money back certainly helps!
Let's talk about deposit insurance next.
The FDIC guarantees deposits in American banks up to $250,000 for an individual and $500,000 for a couple. A corporation is guaranteed to $250,000 as well. When a FDIC insured bank is closed down the FDIC typically gets the money back to the bank customers within a couple of days. They are really fast.
Credit Unions are insured by the NCUA (National Credit Union Administration) up to $250,000 for an individual, $500,000 for a couple and $250,000 for a corporation. Brokerages in the US are insured by SIPC (Securities Investor Protection Corporation) up to $500,000 per customer. ( SIPC doesn't insure against losses in the stock market. They cover your losses if the brokerage itself goes bankrupt.)
How can you make sure your money is safe in the bank?
- Make sure your bank or credit union is insured by the FDIC or NCUA.
- When you have over $250,000 in one bank, it is time to diversify and open another account at a different bank.
- Remember that the $250,000 insurance is for ALL your accounts at one bank. (For example: Your IRA has $200,000, your savings account has $50,000 and your checking account has $5,000. This totals $255,000 and the FDIC only insures $250,000 of it.)
As long as you make sure your bank is FDIC insured and you have less than $250,000 in the bank your money will be safe. You might as well keep your money in the bank and make some compounding interest on your money!