More and more people are wondering how safe their money is in a bank after the collapse of Silicon Valley Bank and Signature Bank.
Online searches asking this question has popped up as Americans fear their bank may be next to fail.
Experts say there’s no reason for customers to worry about money being held in banks covered by the Federal Deposit Insurance Corporation, especially since very few depositors exceed the 250,000 limit. $ of insurance.
And with Signature and SVB, the government has taken extraordinary steps to insure deposits above this limit.
clark kendall, chairman and chief executive of Kendall Capital, a wealth management firm, said the government’s actions set a precedent for any other bank failures. “The FDIC will now step in and insure all depositors,” he thinks.
What caused the collapse of the SVB?
The collapse of Silicon Valley Bank was tied to weakness in tech stocks and the Federal Reserve raising interest rates.
The bank’s customers – mostly startups and other tech companies – needed cash after venture capital funding began to decline. These customers have started withdrawing their SVB deposits to pay for their expenses.
SVB hadn’t planned so many withdrawals at the same time. And when it happened, the bank was ill-prepared with minimal deposits on hand and most of its money tied up in US Treasury bonds.
Normally this is considered a safe long-term investment, but Fed interest rate hikes drives down the value of treasury bills.
SVB had to start selling these bonds at a loss to meet withdrawal requests, but that was not enough.
Last week the bank said it had suffered an after-tax loss of $1.8 billion and would sell $2.25 billion in new shares, spooking investors. The bank’s shares fell and depositors decided to withdraw more money than the bank could provide. Two days later, regulators seized the bank’s assets.
How is this different from the bank meltdowns of 2008?
Although the collapse of SVB and the stress that affects the banking system may bring back memories of the financial crisis of 2008, it has little to do with the previous episode.
The 2008 crisis enveloped the entire housing market, threatened the survival of the nation’s largest banks and plunged the economy into its worst recession since the Great Depression.
In the early 2000s, banks approved subprime mortgages for unqualified borrowers who could not refinance or repay loans when the housing bubble burst. As house prices fell, the pain quickly spread to more traditional borrowers who defaulted on their mortgages and to banks who bundled mortgages into securities and sold them to investors. other investment companies.
As the value of these securities plummeted, banks all but stopped lending, millions of Americans lost their homes to foreclosure, nearly 9 million workers lost their jobs, and nearly $20 trillion dollars of household wealth were wiped out.
The current crisis began with a single regional bank that disproportionately served tech companies.
A second bank, Signature Bank, also had to close and the stress spread to other regional banks with concentrated portfolios. But that hasn’t generally jeopardized larger, more diversified banks, says EY-Parthenon chief economist Gregory Daco.
And while SVB faced “interest rate risk”, which ultimately led to its demise, banks in 2008 faced “credit risk” – the most serious risk of default, said Daco.
Another key difference is that commercial banks now have a much larger capital cushion to deal with losses, with cash representing 14% of their assets, up from 3% at the start of the financial crisis, says Jeffrey Roach, chief economist of LPL Financial.
The value of these assets, largely Treasury bills, is known. That’s different from the underlying value of mortgage-backed securities in 2008, Daco said.
And this time, regulators acted within two days to ensure deposit holders from SVB, Signature and other banks could access all their money, Daco says. In 2008, it took months for federal agencies after the failure of Bear Stearns and IndyMac Bank to put in place their most ambitious bailout programs.
Hundreds of banks went bankrupt during the 2008 crisis, compared to two so far during the SVB episode. And the current crisis will prompt banks to cut lending, but not as much as in 2008, economists say.
“Unlike 2008, the government is getting ahead of the problem rather than trying to clean up afterwards,” says Brad McMillan, chief investment officer of the Commonwealth Financial Network. “We are not ready for a repeat of the Great Financial Crisis.”
How does FDIC insurance work?
The FDIC covers up to $250,000 the value of the deposits at Banks insured by the FDIC.
The $250,000 limit is per depositor, per insured bank for each category of account holder, except for some accounts including investment accounts, life insurance policies and safe deposit boxes or their contents.
Here are some of the account types insured by the FDIC
- Verify Accounts
- Savings accounts
- Negotiable withdrawal order accounts (NOW)
- Money Market Deposit Accounts (MMDA)
- Certificates of deposit (CD) and other term deposits
- Cashier’s checks, money orders and other official instruments issued by banks
Deposits over $250,000 can also be protected.
Should I withdraw money from the bank?
“Every American should know that their accounts are safe and their deposits are protected,” said Jeff Sigmund, spokesman for the American Bankers Association. “Our industry will work with the administration, regulators and Congress to further build that trust,” Sigmund said. .
The National Bankers Association, which promotes minority-owned financial institutions, issued a statement on Monday to assure customers that their deposits are safe in banks.
“Minority depository institutions are very different from SVB and Signature Bank, which had high concentrations of crypto deposits and volatile venture capital,” President and CEO Nicole Elam said in a statement. “Minority banks are not exposed to riskier asset classes and have the capital and strong liquidity to better serve consumers and small businesses.”
David Saccoprofessor of finance and economics at the University of New Haven’s Pompea College of Business and former fixed-income trader, said most banks are “in better shape than they have been in a long time “.
“Anything can happen. But I’m much less worried about it spreading in terms of big banks having the same problem,” he said.
Which banks are safe from collapse?
The Financial Stability Board, an international organization created after the 2008 crisis, maintains a list of banks which are colloquially considered “too big to fail”.
In addition, the United States created a post-crisis Financial Stability Oversight Council to also determine which banks are systemically important to the country’s banking stability. The board and the FSB impose unique restrictions on these banks, such as how much depositor money they can lend and how much money they must have on hand.
The restrictions are designed to add an extra layer of protection beyond what banks would do if left to their own devices, according to the architects of post-2008 regulation. That’s not to say these banks can’t be in trouble, but it’s safe to say that the government wouldn’t allow them to collapse, as that would endanger the country’s overall financial stability.
At the top of the list is JPMorgan, the country’s largest bank. It did not respond to USA TODAY’s requests for comment regarding the security of its customers’ deposits. Citibank, the country’s third-largest bank, declined to comment.
Charles Schwab also declined to comment but pointed out Monday report which noted that more than 80% of its total bank deposits fall within FDIC insurance limits. In comparison, 6% of total national filings were insured at Silicon Valley Bank, according to S&P Global.
Ally Bank told USA TODAY that “nearly 90% of our customers’ deposits are fully (FDIC) insured.”
PNC Bank said its “strong capital and liquidity levels position us well to continue to support our customers regardless of the economic environment.”
Bank of the First Republic, Capital One and Bank of America did not respond to requests for comment.
How to protect your money
There are a number of things you can do to ensure that all your money is safe in the unlikely event that your bank fails.
You can open multiple accounts at different banks, according to the FDIC. You can also open a joint checking account which would insure up to a total of $500,000 on the account ($250,000 per person).
“Nobody needs to worry about losing their deposits as long as they’re at a bank that has this FDIC symbol somewhere on their logo,” Sacco said. “You certainly don’t have to panic.”
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