After Silicon Valley Bank Collapsed, The FDIC Offers Some Protection For Your Cash.

Everyone's attention was drawn to SVB, which serves as a reminder to consider where our cash is held.

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​“Is my money safe?”  

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The Silicon Valley Bank SIVB, which failed last week, may have prompted this question to be one of the most asked. Following the stock market crash of 1929 and the subsequent failures of several banks, the Federal Deposit Insurance Corporation (FDIC) was created to protect the money of your banks in 1933.

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Currently, the FDIC oversees and insures over 5,000 banks. It is rare for a bank to be placed in receivership, such as Silicon Valley Bank. The FDIC reports there were no failed banks in 2021 or 2022. It was an atypical failure, as there are only a few bank failures every year. Its size caught everyone's attention and made us think about where our cash is stored. 

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During the late 1980s, I had the opportunity to learn first-hand how FDIC insurance works. A regional bank went bankrupt at the end of December as a result of its financial difficulties. What is my issue? During my time at this company, all of the company's money was held there, and I received a payroll check from the company. Despite the fact that I was able to deposit it, the check bounced. After having paid my month-to-month rent, utilities, and other bills before leaving for a ski trip in the New Year, I found myself with a number of overdrafts. My company was made whole as a result of the FDIC's insurance policy covering the bank I worked for. Those overdrafts have been refunded to me, and the new bank I have been assigned to has reissued my paycheck from the old bank. In my opinion, the value of having an FDIC-insured bank benefitted me both in terms of saving my day as well as my pocketbook. Besides that, I was able to keep my job, since the company still operates today.

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What is the level of safety for your money?

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FDIC-insured banks offer $250,000 in insurance per account holder. You do not purchase the insurance, the bank does. If you have savings with a bank that is insured by the FDIC, you are covered automatically.  

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Checking, saving, and CD accounts are insured up to $250,000 per person, not per account; however, a cash savings strategy creates more coverage. In the case of a joint account, both of you are covered for $250,000, for a total of $500,000.

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You can also establish your account as a Paid on Death (POD), which is insured by the FDIC. For my client, keeping more than $500k in savings helped her feel comfortable. The bank was instructed to add POD designation to her account so that the cash would go to her three children equally upon her death. Her insurance was also increased (3 x $250,000 coverage added) by this step because the FDIC insures up to $250,000 per beneficiary. Revocable trust beneficiaries are also affected by this beneficiary impact, although starting April 1, 2024, trust coverage will max out at $1,250,00. 

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Banks also ensure retirement accounts up to $250,000 if they are cash accounts, not investment accounts.

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Besides providing peace of mind to bank depositors, the FDIC goes above and beyond that by examining and supervising banks to help prevent the need for their insurance to be needed in the first place. Also, they take over the receiverships of failed banks that have failed. There are also consumer programs that are available, such as Money Smart, a financial education resource for consumers. 

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There is insurance available to other financial institutions as well. Credit unions have insurance through the National Credit Union Administration (NCUA). NCUA was established in 1970 to insure and oversee member credit unions. Similar to the FDIC, their insurance coverage limit on cash accounts is $250,000 as well.   

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The Securities Investor Protection Corporation (SIPC) provides financial protection to brokerage firms in times of financial difficulty. There is a coverage limit of $500,000 for investments and $250,000 for cash under SIPC. Investments are not at risk if their value decreases. Investing in a company that fails is covered by insurance. 

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It is possible to receive coverage for up to $500k if, for example, XYZ brokerage company where you held your investments fails. It is unlikely that you will be able to recover all of your investments and cash if you own $1 million in investments and cash. 

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Protecting yourself

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There are plenty of banks that want to be the one point of contact for you when it comes to all of your banking and financial needs. It is their goal to be your one-stop shop for all your needs. However, if you are one who likes to keep cash in savings accounts, you may want to consider adding self-protection by adding diversification into your savings account. Having two banks or a bank and credit union would mean that you would still be able to access your other banking accounts even if one of the financial institutions failed. The "magic" number to keep everything safe in the FDIC-insured institution is $250,000, so keep that in mind when planning your investment portfolio.

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