How to Safely Store Deposits If You Have More Than $250,000
(Bloomberg) — The collapse of Silicon Valley Bank, and fear that the pain is spreading to other financial institutions, is raising an uncomfortable question: Is it safe to leave a lot of money in a single bank?
The answer, at least according to financial advisers, is generally yes. Thanks to banking legislation dating back to 1933, the Federal Deposit Insurance Corp. covers up to $250,000 per depositor in qualified accounts at insured banks.
Crucially for savers, US authorities also created a new bank backstop that the Federal Reserve said is big enough to protect the entire nation’s deposits, including those above $250,000 at failed banks like SVB.
Still, savers with deposits higher than that key threshold are feeling jittery.
“It will be top of people’s minds,” said Jeremy Keil, financial adviser at Keil Financial Partners in New Berlin, Wisconsin. “Back in 2008, that was one of the biggest things people were asking about, the deposit-insurance limits.”
Bloomberg News interviewed financial advisors around the country, and this is what they said high-deposit savers should know now.
A knee-jerk reaction to the run on SVB would be to rush to open another account at a different bank. But advisers say there are simpler (and likely quicker) ways to increase your FDIC-insured deposits at your own bank.
The FDIC covers $250,000 for individuals’ qualified accounts, but also up to $250,000 for each co-owner of a joint account.
“The easy step is if you’re married, you can get $1 million of FDIC coverage by having a personal bank account in your name, a personal bank account in your spouse’s name and a joint account,” said Keil.
Advisers also recommend spreading some of the cash into accounts for each of your children, or other beneficiaries within your family. These can take the form of revocable trust accounts.
Still, advisers say there is a case to be made for opening up accounts at other FDIC-insured banks.
Single people or those who can’t take advantage of joint-account coverage may find parking some of their cash at another insured bank is a good way to hedge risk. Thilan Kiridena, founder of Capital Elements, a financial advisory firm in New York, says customers of smaller regional banks in particular may want to diversify if they have cash holdings in excess of FDIC limits.
Regional bank stocks were hit particularly hard on Monday as investors fled the sector despite assurances from regulators.
“In a situation like this, the more regional banks, the smaller community banks would be some of the first banks to absorb today’s pressure,” Kiridena said. “If you’re working with a smaller bank, a community bank and you know that the deposit strength or the ability to raise capital for those banks is limited, I think it would be a rational decision today to move it to a safer bank.”
A larger question money managers have for people worried about their FDIC limits: Why are you sitting on so much cash in the first place?
Higher interest rates have made holding cash in high-yield savings accounts much more appealing than it was a year ago, but there are even more attractive opportunities in short-term Treasury bills, which are liquid and virtually risk-free.
“Shorter-term investments right now are certainly benefiting from the higher interest rates,” says Liz Miller, president at Summit Place Financial Advisors in New Jersey. “Instead of a bank account, you might even look at a three-month Treasury bill, which is very temporary and still has very good rates and is fully guaranteed by the US government.”
Miller also said there’s a good chance the Federal Reserve slows down its rate-hiking path in response to the turmoil in the banking sector. This supports her strategy of investing now in short-term Treasuries and bonds to take advantage of the higher interest rates before a potential slowdown from the Fed.
Despite the worry, advisers caution that the US does not appear to be on the precipice of another 2008-style financial crisis, let alone something like the Great Depression.
“Don’t keep cash,” said Keil, adding that he has to talk a lot of people down from holding physical currency at home because they are worried about the banking system. Home insurance policies may not cover 100% of the value of your cash, plus it will lose value over time because of inflation.
Advisers say being prepared is key, but warn against going overboard in a situation that so far seems to be confined to a few regional banks with large exposure to the tech sector.
“I wouldn’t be using this as the foreshadowing for the rest of the economy,” said Marc Scudillo, managing officer at EisnerAmper Wealth Management in New Jersey. “It’s important to be selective and diversified. It’s also important to be cautious that there may be a slowdown in growth. But it’s important to put it into perspective versus 2008.”
To contact the authors of this story:
Charlie Wells in London at [email protected]
Misyrlena Egkolfopoulou in New York at [email protected]