In light of the recent bank closures, advisors Amanda Vaught, JD and David Vaught, CFA created a short video explaining the recent bank runs on Silicon Valley Bank and Signature Bank.
- The regulatory environment that led to their collapse,
- The FDIC response,
- What this could mean for the Fed hiking rates, and
- How we think investors should think of the recent news.
You may be wondering how to protect yourself in light of the recent bank closures.
Here is what we suggest:
- Look at all of the banks where you hold your money.
- Add up all of your deposits: checking, savings, CDs, everything in your name at one institution, including one half of any joint accounts.
- Is it more than $250,000? If so either: invest some of your funds or transfer funds to a different bank.
While performing this exercise, determine the interest rate being paid on your funds. You want to decide whether your cash is working for you. For short-term cash, a six-month Treasury bill is yielding more than 5% as of this writing. For medium-term cash, you can lock in a 2-year rate on a Treasury note around 4.6%. (Rates listed are as of this writing. Treasury yields are currently experiencing high volatility and may change quickly.)
There is no universal correct answer on whether or not buying a Treasury bill is the right move for you. Please ask us to evaluate your unique situation.
Note that as of this writing, the FDIC is covering uninsured amounts (i.e. amounts over $250K) in order to make depositors whole. Don’t expect this to continue. One of these banks was the 16th largest in the U. S., so this bailout is an extension of bailing out “too big to fail” banks. In contrast, in the farm crisis many years ago, 400 rural banks were allowed to fail without intervention into those banks in that sector of the economy. Other smaller banks fail in small numbers regularly without such bailouts.
What about funds in a brokerage account?
Money in a brokerage account is considered uninsured, but SIPC provides insurance similar to the FDIC and most brokerage firms provide supplemental insurance for larger amounts.
Remember, since the 2008 financial crisis, all of the major large banks undergo periodic government-mandated stress tests, including running scenarios of interest-rate spikes and bank runs. The bank failures we’ve seen recently are at mid-size banks who have not undergone the same stress-test regulation, due to a relaxation of this regulation to these banks during the prior administration in Washington.
As recent events show, even keeping money in a bank carries some risk. The risk has always been there, even if you were not previously aware of it. We urge our clients to not let short-term scares impact their financial decisions. Responding to fear is itself a risk, one which can have significantly more detrimental consequences than a short-term crisis from a mid-size bank failure that was quickly resolved by the FDIC.