The Banking Crisis and You
This is the 4th and final Part of an article on the recent banking crisis in the U.S.
Part 1: What Caused the “Run on the Bank?” can be found here.
Part 2: How Do Banks Invest Our Deposits? can be found here.
Part 3: What Dangers are Lurking Below the Surface? Can be found here.
How Can you Protect Yourself?
The best way to protect yourself is to keep your deposits at any one FDIC-insured bank below the FDIC insurance limits. For an individual account the limit is $250,000; for a joint account it is $500,000. The FDIC limit may be higher, depending on how your accounts are titled, and details are available at FDIC.gov.
Do not assume the FDIC will insure amounts above the FDIC limits in the future. The FDIC and the U.S. government have received criticism for insuring the full amounts at Silicon Valley Bank and Signature Bank, and for bailing out Wall Street firms and big banks during the 2008 financial crisis.
If you need to keep amounts of cash that exceed the FDIC limits, divide it among several different FDIC- insured banks. Each bank will provide you with the FDIC insurance for the balances in your accounts.
Another strategy for large amounts of cash is to use a brokerage account to buy “brokered CDs.” These carry the full amount of FDIC insurance for CDs from each bank. For example, you can buy 10 different $250,000 CDs from 10 different banks, (all in your brokerage account), and you would then have $2.5 million in FDIC insurance. Using brokered CDs does not help with savings and checking accounts, but you can build a CD “ladder” using CDs that mature at 3 months, 6 months, 1 year, etc. so that a CD matures frequently to match your cash flow needs.
With all of the risks that the banking industry is facing, it is likely there will be more bank failures in the future. Speaking of the recent banking crisis, JP Morgan Chase CEO Jamie Dimon stated in April “there will be repercussions for years to come.”
The bank failures were a wake-up call for the banking industry and regulators, and the underlying problems are not easy to fix. The unrealized losses that many banks have on their reserves (due to the increase in interest rates) cannot be fixed quickly. Bank customers are aware they can move their money rapidly to access higher rates at other banks or investment firms. Potential losses due to defaults on car loans and commercial real estate loans are a factor. All of these add up to increased risk for regional and smaller banks going forward, and likely more bank failures.