In response to the failure of Silicon Valley Bank bank this week, here are some insights and additional information on what the heck happened and how cash is protected at banks and brokerage firms in general.
What the heck happened at SVB Bank?
For those that haven't watched the news in the last few days, Silicon Valley Bank's public downward spiral began late Wednesday when it surprised investors with news that it needed to raise $2.25 billion to shore up its balance sheet. Within 48 hours, a panic by the venture capital community that SVB served ended the bank’s 40-year-run. The bank experienced billions of dollars in losses from selling securities to try to raise capital and also from a run on the bank that led to excess outflow of capital. Regulators shuttered SVB Friday and seized its deposits making it difficult for the bank's venture firm clientele to make payroll. It was the largest U.S. banking failure since the 2008 financial crisis and the second-largest ever, sending shock waves through the finance sector on Friday.
$91 billion worth of Treasuries that the bank bought with customers’ deposits had lost some $15 billion in value due to interest rate hikes. And, to put it in perspective, in 48 hours, SVB bank lost in simple sales more than the dollar amount that venture capitalists invested in ALL women-owned ventures in 2022. Frankly, I'm not sure which is more depressing.
"Despite initial panic on Wall Street, analysts said SVB’s collapse is unlikely to set off the kind of domino effect that gripped the banking industry during the financial crisis. 'The system is as well-capitalized and liquid as it has ever been,' Moody’s chief economist Mark Zandi said...The FDIC typically sells a failed bank’s assets to other banks, using the proceeds to repay depositors whose funds weren’t insured. A buyer could still emerge for SVB, though it’s far from guaranteed." -CNN
In the meantime, here's what you can do as an investor to insure excess deposits and protect your cash from bank failures:
Check whether your bank or brokerage firm is a member of the FDIC or the SIPC
The Securities Investor Protection Corporation (SIPC) and Federal Deposit Insurance Corporation (FDIC) insure against personal financial ruin when banks or brokerages fail.
What is an FDIC insured account? An FDIC insured account is a bank account at an institution where deposits are federally protected against bank failure or theft. The FDIC is a federally backed deposit insurance agency where member banks pay regular premiums to fund claims. The maximum insurable amount is currently $250,000 per depositor, per bank.
What is SIPC? The Securities Investor Protection Corporation (SIPC) protects customers if their brokerage firm fails. Brokerage firm failures are rare. If it happens, SIPC protects the securities and cash in your brokerage account up to $500,000. This is not the same as protecting against market losses, which can occur in any investment account.
As a registered investment advisory and certified financial planning firm, we assist clients with investing assets at custodians that are both member FDIC and member SIPC.
Will one of these bodies step in and repay your losses if your bank fails? It depends and there are limits. More than 85% of SVB bank’s deposits were uninsured, according to estimates in a recent regulatory filing. That’s because FDIC deposit insurance is meant for everyday bank customers and maxes out at $250,000. Many Silicon Valley startups had millions, or even hundreds of millions of dollars deposited at the bank—money they used to run their companies and pay employees. Right now, nobody’s sure how much of that cash is left.
If your accounts go above and beyond what FDIC and SIPC would cover, here are some additional options on how to protect assets personally or for your business.
1. You can use CDARS to insure excess bank deposits
The Certificate of Deposit Account Registry Service, or CDARS, represents a network of banks that insure millions for CD savers. You sign a CDARS placement agreement and custodial agreement, then invest money with a CDARS network member. This money is then divided into CDs issued by different CDARS banks. So, theoretically, you could invest $5 million with CDARS and have it split into multiple CDs, each of which would be protected by the $250,000 FDIC insurance limit.
2. You can open a cash management account
Some brokerages and financial institutions offer access to a cash management account. Cash management accounts can allow you to spend or pay bills. They are also useful for insuring excess deposits.
Cash management accounts that have a sweep feature allow deposits to be spread across multiple FDIC-insured banks. For example, if you have $500,000 in your cash management account, the financial institution may spread it across three banks. This allows you to spread your money out without losing FDIC insurance protections. Keep in mind that this benefit only extends to cash. Any securities you hold at a brokerage would be covered by the Securities Investor Protection Corporation (SIPC), which insures against institutional failures, but not against market losses.
3. Open accounts with different ownership categories
For example, you could open a joint savings account with a spouse — and be eligible for up to $500,000 in FDIC insurance because each account holder is insured up to $250,000. If you have significant excess deposits, you could consider setting up a trust and name beneficiaries who would receive the money upon your death. Each beneficiary is insured up to $250,000. You could set up a separate business account and personal account. Separate ownership categories can increase FDIC coverage. Alternatively, you can split cash among several different banks.
In short, there are multiple ways to protect cash above and beyond the $250,000 FDIC limit at the bank. Although it's not common, bank failures can happen. When a bank fails, if you have deposits that exceed the FDIC’s limits, there are different ways to close the coverage gap. Know your options for insuring excess deposits. Also keep in mind that investments such as stocks, bonds, etc do NOT have FDIC insurance coverage.
There are benefits and considerations with ALL things money and there is no perfect investment, so it's important to review your own portfolio, risks, and the purpose of those funds regularly. This is obviously something you want to meet with a certified financial planner about, not simply assume that the bank will let you know when you reach FDIC limits on coverage. (Even venture capitalists can benefit from meeting with financial planners). Do you need help figuring out how to best manage cash holdings, analyze risk, and balance competing financial goals? Schedule a discovery call
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.