FDIC Insurance
It’s been an uneasy couple of weeks for anyone with a bank account in the United States—so just about everyone. We wanted to reach out to calm some fears and let you know what actions may be advisable in the wake of the collapse of Silicon Valley Bank. We will address five things in this newsletter:
Who needs to worry?
What actions should I take?
What on earth happened to Silicon Valley Bank?
What do declines in bank stocks mean for me as a customer?
How is my cash protected at TD Ameritrade?
Who needs to worry?
Do you have less than $250,000 total in your bank or credit union between checking, savings, money market, and CDs? If so, that money is fully insured, either via the FDIC (for banks, from larger institutions like Wells Fargo to regional banks like Umpqua) or the NCUA (for credit unions, like Unitus or Rivermark), which have exactly the same insurance provisions. You can breathe easy. Even in cases where a bank becomes undercapitalized, the FDIC is remarkably good at its job, and you’ll be able to see and access your money almost immediately. This article from 2009 shows how one bank in Vancouver, WA closed on a Friday at 5:00pm, and all depositors were able to access their money the next business day at Umpqua Bank. Please note that for this newsletter, we’re only going to say “FDIC,” but every provision also applies to your credit unions insured by NCUA.
If you have more than $250,000, it gets a bit more complicated. The FDIC provides $250k in coverage per ownership type, meaning you get $250k, your spouse or partner gets $250k, and your joint accounts get $250k. They also count extra beneficiaries as an ownership type, so if you have 3 beneficiaries on one account, you get to add $500k for a total coverage of $750k. I’m happy to answer questions about this—feel free to email me or call in! There are also insurance calculators available—here is one from the FDIC, and here is one the NCUA, which insures credit unions, has made. But if you’d like to do some sleuthing on your own, here’s a quick rundown:
I’m the only owner but I have beneficiaries (TOD or POD) on my accounts. If you have more than one beneficiary, you get an extra $250,000 per beneficiary.
Example: Ron has two children, Mary and Joe, who are beneficiaries on all his US Bank accounts. Each beneficiary after the first adds an extra $250k of coverage. His total coverage is $500k.
I’m married or partnered and we share some accounts. For joint owners of account(s), coverage is doubled from $250k to $500k.
Example: Mike and Susan are married. They each have their own checking and savings accounts with a total of $50,000 per person, and share joint checking and savings accounts with $400,000 total. Each of them gets $250k in coverage for their personal accounts, plus their jointly owned accounts get $500k in coverage in a separate bucket. They are fully insured.
What actions should I take?
As we mentioned above, if you have $250k or less at one bank, you are fully FDIC-insured and we recommend no changes.
If you aren’t fully insured, and it makes sense to take advantage of the above provisions regarding joint ownership and beneficiaries increasing coverage, absolutely do so! You may also consider taking the “spillover” from one bank to another to ensure not only your FDIC coverage, but also to preserve instantaneous access to your funds by having some always accessible if something happened to one of those banks. Remember, even in cases of bank failure, the FDIC will ensure near-immediate access.
What on earth happened to those banks, then?
Silicon Valley Bank was an odd sort of bank. It worked exclusively with startup tech companies that were backed by venture capitalists, so its customer base was:
Very concentrated in one industry, meaning all customers would be affected by the market for tech companies or products.
Likely to need its money back in the short-term for business reasons, rather than investing for long-term savings.
A tightly-knit group of customers who all knew one another.
Silicon Valley Bank worked with companies who were overrun with cash from venture capitalists, so it didn’t make loans. Instead, it bought government bonds. This isn’t a bad thing! It bought bonds in 2020 and 2021, when interest rates were historically low. When interest rates started to rise, the value of its bonds compared to new bonds went down quite a bit. This isn’t a bad thing either! If it could just hold onto those bonds until they matured, they would take their 2-3% interest and give the principal back to its customers when they wanted money.
However, SVB made one big mistake: it bought basically all its deposits into longer-term bonds. This is not what typical banks do. Banks, if they buy bonds, will usually buy some short-term and some long-term bonds so that they always have some money becoming free. And as we stated above, those tech companies were all equally vulnerable to needing their money back at the same time. SVB made two big bets: that interest rates wouldn’t go up, and that its startup tech customers would continue to have huge growth. Both of those ended up being wrong.
We all know the tech sector has been struggling over the last 18 months, and SVB customers were no exception. When they started to need this money to make payroll, SBV was forced to sell some of those low-interest rate bonds in the market rather than holding them until they matured. Bonds are very interest rate sensitive, so they were taking a loss of around 9% on this sale to free up cash. And because all the customers knew one another, they all acted in lockstep once the first signs that SVB’s bonds weren’t worth quite enough to cover 100% of deposits if sold, and they all tried to take their money out at the same time. In It’s A Wonderful Life style, this was a bank run.
FDIC insurance protects up to $250,000 per depositor, which works well for many households in this country. Because so many of SVB’s customers were companies, and companies with huge amounts of venture capital cash, they had staggering amounts of money deposited. Roku had $487 million with SVB. Had every customer of SVB been a married couple with $450k deposited, this would have been a non-event. Everyone would have woken up two days later and had their deposits at a new bank. However, the federal government had to decide whether to make a special exception and protect the uninsured deposits of all those customers (which it did), and the uncertainty during that time was what made things difficult.
Fear regarding bank health is contagious, and that contagion spread to Signature Bank, which closed on Sunday. Let’s be clear: no bank has its customers’ deposits invested in such a way that it can give everyone’s money back at once. Bank runs are one of the reasons that FDIC insurance exists, to give bank customers confidence that they can keep their money where it is.
What does this mean for bank stocks that are going down?
Bank stocks mean absolutely nothing for the health of your deposits, so long as they are FDIC-insured. We’ve seen bank stocks, particularly for regional banks, decline over the past couple of weeks because investors are worried about banks in the short-term. However, this only concerns investors who own shares of the bank itself. It has nothing to do with customers of the bank. The decline in stock value reflects that investors are concerned, but the stock market is based on fear and greed just as much as on facts.
How is my cash protected at TD Ameritrade?
As you know, money in your TD Ameritrade accounts that is invested in stocks, bonds, mutual funds, or ETFs doesn’t have any insurance against loss. We play a long game with that money. However, funds that are in cash as part of a dollar cost averaging strategy, as well as any CDs you own, are FDIC insured according to the provisions we outlined above. In addition, TD has purchased special coverage that protects up to $2 million in cash.
Please don’t hesitate to reach out to me with any questions that come up. This is a scary time, and I am here to help you figure out if any changes need to be made, or just by telling you that you’re covered.