For the past week-plus, you’ve no doubt been bombarded with bombastic headlines about “bank runs” and a couple failed regional banks.
We won’t lie: This isn’t exactly a rosy situation—not for people with money in those banks, not for investors in those banks, and not for the people running those banks. But we can also tell you that for the average person who might be nervous about their bank accounts, you can rest a little easier tonight.
Today, we’ll talk about why that is—namely, a form of bank protection that the Milwaukee Bucks’ Giannis Antetokounmpo famously used to the max.
But first, a quick catch-up for people wondering what has prompted the recent panic.
The Tea: California-based Silicon Valley Bank (SVB) was one of the nation’s most vibrant regional financial firms. It largely served the startup and venture capital community, and had grown rapidly in recent years—as of the end of 2022, it was America’s 16th-largest bank by assets (roughly $209 billion) and boasted some $175 billion in deposits.
And a little more than a week ago, it suffered an abrupt “bank run” (what it’s called when many depositors suddenly withdraw all their money), was forced to close, and was taken over by the federal government.
All within the span of about 48 hours.
So, how exactly did a 40-year-old financial institution collapse within a matter of days? Well, here’s a quick breakdown by Phillip Wool, Managing Director and Head of Investment Solutions for asset manager Rayliant.
- “The drama began on Wednesday,” he says, when SVB surprised investors by announcing that it would have to sell additional stock to try to raise $2 billion.
- “That capital raise was necessary because the bank had just dumped its entire portfolio of so-called ‘available-for-sale’ securities,” Wool says. In short, SVB held bonds that, if needed on short notice, could be sold to meet liquidity needs—say, lots of depositors withdrawing their money at once. These bonds, which were bought years ago, had declined in value as interest rates rose, and SVB sold them for a $1.8 billion loss.
- “By the bank’s account, its equity sale was simply intended to add back some cushion to its balance sheet,” Wool says. “The bank’s close-knit network of tech startup and [venture capital] clients didn’t see it that way and collectively decided none of them wanted to have money stuck in a failed bank.”
- “Deposits began flooding out and, by the end of Thursday, some $42 billion had gone out the door … and there was talk of insolvency.”
- “On Friday, attempts to find a buyer had come up short and regulators closed things down, marking the second-largest bank failure in American history.”
(The deeper background to this story is interesting—we recommend reading Bloomberg’s Matt Levine, NPR’s Jaclyn Diaz and The Guardian’s Jonathan Yerushalmy—but we don’t want to stray too far from the point)
SVB wasn’t alone in its troubles, mind you. New York’s Signature Bank also failed and was seized by the government over the past week or so; a group of big banks are trying to bail out California’s First Republic Bank; and Switzerland’s largest bank, Credit Suisse, will borrow up to $54 billion from the nation’s central bank to try to stay afloat.
All of these headlines have sparked concerns from everyday Americans, who are now asking themselves “Is my deposit safe?” and “Should I move my money to another bank?”
For the vast majority of readers, the answers will be “yes” and “no,” respectively.
The Take: Here’s the quickest way to determine whether you need to worry at all about the money in your bank.
Ask yourself this question:
“Do I have more than $250,000 held in one or more accounts at any one bank?”
If the answer is “no,” you don’t need to worry.
If the answer is “yes,” you might need to take action—but honestly, you still might not.
The reason revolves around something called “FDIC insurance.”
The FDIC is a nonprofit, self-regulating organization with close ties to the U.S. Treasury, and it protects depositors like you from bank failures by insuring funds held at more than 4,700 American financial institutions, including more than 4,100 commercial banks—or, in other words, virtually every bank in the country.
This protection is backed by the Deposit Insurance Fund, which receives money from two different sources: Insurance premiums paid every year by FDIC-member banks and interest earned on money invested in U.S. government debt.
FDIC insurance covers up to $250,000 in deposits per account holder per institution—or put differently, you get $250,000 in protection at each bank where you have money stored. (This figure is $500,000 in deposits per institution for joint accounts.)
Eligible accounts can include:
This time around, the U.S. government has jumped in to offer special protection for depositors in SVB and Signature Bank—even on funds above the $250,000 that weren’t insured. But because this is a special exception, you should plan your finances around FDIC insurance being the only true protection you have.
Let’s go over a few examples so you can better understand when your money would be protected—and when it would not.
All of your money would be protected if, say…
- You held $500 in a savings account at one bank.
- You held $5,000 in a savings account and $5,000 in a checking account ($10,000 total) at one bank.
- You held $50,000 in a savings account, $50,000 in a checking account, and $50,000 in a CD ($150,000 total) at one bank.
- You held $200,000 in a savings account at one bank, and $200,000 in a checking account at a different bank.
All of your money would not be protected if, say …
- You held $275,000 in a savings account at one bank. ($275,000 – $250,000 = $25,000, so $25,000 of your money would not be insured.)
- You held $150,000 in a savings account and $150,000 in a checking account ($300,000 total) at one bank. ($300,000 – $250,000 = $50,000, so $50,000 of your money would not be insured.)
- You held $200,000 in a savings account, $200,000 in a checking account, and $200,000 in a money market account ($600,000 total) at one bank. ($600,000 – $250,000 = $350,000, so $350,000 of your money would not be insured.)
- You held $275,000 in a savings account at one bank, and $275,000 in a checking account at another bank. ($25,000 of your money in one bank would not be insured, and $25,000 of your money in the other bank would not be insured.)
Most Americans simply do not have $250,000 to stash in even one bank, let alone many, which is why we say most of you shouldn’t worry—as long as your money is in an FDIC-insured bank account, you’re fine. (But if it’s in a non-insured bank account, consider moving it somewhere that has FDIC protection!)
However, if you do have more than $250,000 stored in any one bank, you might have a decision to make.
Why do we say “might”?
While SVB and Signature failed (and First Republic is reeling), most banks don’t face the same risk. Those three banks had strong concentrations of large (and thus mostly uninsured) deposits from startup companies, many of which are facing severe financial strain. But most large and regional banks have a more diverse depositor base, a lot more of whom fall under the $250,000 FDIC insurance threshold—and thus are less likely to rush to withdraw and spark a bank run.
Still, if you want to take the absolute safest path, you’ll want to spread your cash around to multiple banks so that you have no more than $250,000 in any one bank.
One of our favorite examples of maximizing FDIC protection comes from none other than the “Greek Freak”: Giannis Antetokounmpo, the Milwaukee Bucks’ star power forward.
Last year, Bucks co-owner Marc Lasry told Bloomberg News that Antetokounmpo had spread his cash across 50 different banks, each containing $250,000, specifically to make sure every cent of his money was FDIC-insured.
Upon discovering that, Lasry—who also just so happens to be a hedge fund manager and billionaire—suggested to Antetokounmpo and his teammates that they might want to take a different approach: investing it.
To be clear: If you do decide to invest your money, you run the risk of losing some (or all) of it if your investment choices don’t pan out. But even then, you typically will enjoy a similar type of institutional protection as FDIC insurance.
The Securities Investor Protection Corporation (SIPC) is another nonprofit, self-regulating organization that, as the name would suggest, protects investors who buy “securities” (namely, stocks and bonds). The SIPC has a few jobs, including stopping fraudulent trading and educating investors. But it also offers protection in the event that a brokerage firm fails.
Specifically, the SIPC offers each person $500,000 per account per brokerage firm (with a limit of $250,000 for cash balances). So, technically, you could have multiple accounts at one firm that each have $500,000 in protection, as long as those investment accounts are in “separate capacities.” Separate accounts include individual brokerage accounts, joint brokerage accounts, individual retirement accounts (IRAs), Roth IRAs, and more.
A few examples to explain what your coverage would look like:
- If you had one brokerage account at one brokerage firm, that account would be insured for up to $500,000.
- If you had two brokerage accounts at one brokerage firm, those accounts would only be insured for up to $500,000 collectively.
- If you had a brokerage account and an IRA at one brokerage firm, each account would be insured for up to $500,000.
- If you had a brokerage account at one brokerage firm, and another brokerage account at another brokerage firm, each account would be insured for up to $500,000.
Again, we’ll stress that this insurance only protects you in the event that your brokerage fails. If you YOLO-trade meme stocks until you’re left without a dime, that’s on you.
Riley & Kyle
Young & The Invested (Soon to be WealthUp)
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.