What do the recent bank failures mean for you?

Earlier this month, we all heard or read the news that three different banks collapsed: Silicon Valley Bank, the second largest bank failure in U.S. history, Silvergate Bank and Signature Bank.  While the failures of the latter two banks were mainly caused by their ties to the cryptocurrency market and the bankruptcy of the cryptocurrency exchange FTX, the collapse of Silicon Valley Bank was due to their over-investment in long-term Treasury bonds.  As the Federal Reserve raised interest rates to fight inflation, the value of those bonds decreased and the bank had trouble meeting the demands for withdrawals by its depositors.  Once the bank announced that it would hold an emergency sale of some of its Treasury stock, a bank run ensued and the FDIC took over.  What do these recent bank failures mean for you?

Some may wonder whether these events will trigger a recession.  Indicators of a possible recession would be if banks, especially smaller banks, become more cautious about lending, thereby reducing the ability of consumers to purchase big ticket items; if families and businesses tighten their belts and decide not to make big purchases, travel or hire employees; and whether there are other banks that took similar risks to the failed ones.  Some may wonder if they will now be subject to higher bank fees.  Given that the FDIC went against their normal policy to guarantee that all customers, even those with deposits exceeding the $250,000 limit for FDIC insurance, could get their money back from Silicon Valley Bank and Signature Bank, it seems likely that the FDIC will assess higher fees on banks which will likely trickle down to increased fees for bank customers.

So, what can you do to make sure your bank deposits are safe?  The first thing is to be aware of FDIC insurance and how much it covers.  The Federal Deposit Insurance Corporation (FDIC) was established during the Great Depression in 1933 and initially insured deposits up to $2,500 in 1934.  This number eventually increased to $100,000 as of the 2008 financial crisis, and to $250,000 after the crisis, where it stands today.  Does this mean that you can have no more than $250,000 in any one bank?  The answer depends on how your bank accounts are titled.  A bank account owned by one person is insured up to $250,000, while a joint account is insured up to $250,000 per co-owner.  Therefore, a married couple can have up to $1 Million of insured deposits in any one bank by using two individually owned accounts and one joint account.  Accounts titled in revocable trusts or payable on death accounts can have even more insurance coverage because the limit is $250,000 per unique beneficiary, as long as the beneficiary is entitled to his or her interest in the assets upon the grantor’s death and the beneficiaries are living individuals or IRS-qualifying charities or nonprofit organizations.            

What else should you consider doing?  With interest rates rising for the first time in years, you should consider taking advantage of the higher-yielding options your bank may have available for your cash.  You may even want to look into high-yield online savings accounts for even greater return on your cash holdings.  These accounts are able to offer higher interest rates because of the low overhead of an online-only presence.  Another tool that is gaining popularity is the “cash management account” offered by investment and broker-dealer firms, as well as robo-advisors such as Betterment and Wealthfront.  While similar to savings accounts in that they offer features like debit cards and direct deposit, they are more like cash sweep accounts used in investment portfolios.  When you deposit funds into a cash management account, those funds are then sent to one or more partner banks.  And the more partner banks that your funds are deposited with, the higher your FDIC coverage.

Pets Corner – Ask Anya

Hook Law: Anya, have you heard about Mr. Pickles at the Houston Zoo?

Answer: Yes!  Mr. Pickles is a 90-year-old tortoise at the Houston Zoo who just welcomed his first three hatchlings with his long-time companion, Mrs. Pickles!  They are named Jalapeno, Dill and Gherkin.  They are great news for the critically endangered radiated tortoise species.