In the past few weeks, we have had a few clients calling our office and asking their Wealth Manager, “Should I be worried about my bank?” We thought this question might be on more clients minds so we decided to make that the subject of this month’s blog.
March was a stressful month in the financial industry for both U.S. and European banks, which led to the failure of two large banks, Silicon Valley Bank and Signature Bank. Credit Suisse was under stress, and they were purchased by UBS, another large financial company in Switzerland. You can read more of the details on our blog, “March Madness Comes to the Banks?”
In the blog this month, we will discuss items to consider if you are worried about your bank and wondering if you should make some changes.
We will discuss:
- FDIC Protection for Bank Deposits
- Not all Banks are the Same
- What Should I do with my Bank Accounts?
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FDIC Protection for Bank Deposits
When you deposit your money in a U.S. based bank, your money is insured by the Federal Deposit Insurance Corporation, usually known as the FDIC.
The FDIC describes themselves on their FDIC website as:
An independent agency created by the Congress to maintain stability and public confidence in the nation’s financial system. The FDIC insures deposits; examines and supervises financial institutions for safety, soundness, and consumer protection; makes large and complex financial institutions resolvable; and manages receiverships.
The FDIC describes their insurance as:
FDIC deposit insurance protects bank customers in the event that an FDIC-insured depository institution fails. Bank customers don’t need to purchase deposit insurance; it is automatic for any deposit account opened at an FDIC-insured bank. Deposits are insured up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category.
Deposit insurance is calculated dollar-for-dollar, principal plus any interest accrued or due to the depositor, through the date of default. For example, if a customer had a CD account in her name alone with a principal balance of $195,000 and $3,000 in accrued interest, the full $198,000 would be insured.
Take a Deeper Dive into the FDIC:
You can learn more about the FDIC by reading their Deposit Insurance FAQs and review the deposit coverage for specific types of deposit products and FDIC ownership categories here.
The rules for Trusts Accounts are more complex. You can read the rules on the FDIC website here, as well as further FDIC videos and access to brochures to deepen your understanding.
Not all Banks are the Same
Now that you have a better understanding of how the FDIC insurance works, let’s look at the different banks, as we believe that not all banks are the same. In the U.S., there are four banks that are much bigger than the rest: Citibank, Chase, Bank of America and Wells Fargo. Based on our reading and research, we believe these banks are in good standing and should not have issues.
Investors have been withdrawing their money from the smaller banks and moving that money to these bigger banks, which makes the bigger banks stronger and the smaller banks weaker. The Wall Street Journal reported on March 25th that after the Silicon Valley Bank collapse, the 25 largest banks added $120 billion in deposits and smaller banks lost $108 billion.1
Going forward, one bank that we know that has some heightened risk is First Republic Bank. Shares of their stock fell by 90% as investors have been concerned about the value of their loans and customers are pulling out their money.2 They have suspended payments of their quarterly dividend on their preferred stock and a group of the country’s biggest banks deposited $30 billion into the bank to help stabilize it. Some of our clients that had money at this bank have chosen to move some, if not all, of their money to other banks.
We have not heard of specific issues with any of the other smaller banks, credit unions or savings and loans. There have been reports of concerns at Charles Schwab, whose stock has fallen 43% since the high on January 6, 2023. At Financial Journey Partners, we use Fidelity as the Custodian for all our clients’ accounts, and we believe that Fidelity is in a very strong financial position and will continue to monitor this situation closely.
What Should I do with my Bank Accounts?
If you are worried about the money you have in your bank, first make sure that you do not have more than the insured limit by the FDIC, as described above. If you have more than that amount in your bank, you might consider splitting your money across more than one bank, so you do not have more than the FDIC insured limit in any one bank. Also, you may consider moving some of your money to one of the four biggest banks listed above. At this point, it seems to be a good idea to have at least one checking account at two different banks.
When thinking about where to put your savings, also consider the interest rate on the account. As the Federal Reserve has raised the Fed Funds rate, banks have been slow to raise the interest rates on their savings accounts. While the Fed Funds rate is 4.75%, some banks have an interest rate of less than 1% on their savings accounts. By comparison, some Money Market funds are paying approximately 4.5% So as you consider where to keep your savings, we recommend you also consider the interest rate paid on the account.
If you have questions about your bank and want to discuss where you have your checking and savings account, give your Wealth Manager a call.
Financial Journey Partners - Partners in Your Financial Journey®
Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.
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References:
1 The Wall Street Journal – Biggest Banks Added $120 Billion in Deposits After SVB Failed
2 The Wall Street Journal – First Republic Suspends Dividends on Preferred Stock