The US Treasury, Federal Reserve and FDIC issued a joint statement this past Sunday.1 This irregular announcement was meant to protect the US economy by strengthening public confidence in our banking system. This type of public announcement is not a frequent occurrence. Given that, let’s discuss a few important things to remember about the US banking environment and your bank deposits.
Depositor Confidence
Last week, Silicon Valley Bank customers became concerned about the reliability of getting access to their cash accounts. This is a problem for a bank. If confidence is shaken, concerned customers will want to withdraw their cash immediately. The bank does not have enough cash to handle everyone withdrawing all at once. If the confidence cannot be restored quickly, the government will need to step in and close the bank as they did last week at Silicon Valley Bank.
FDIC Insured Amounts
To help with that confidence, the FDIC has generally stated that the first $250,000 per depositor, per insured bank for each account ownership category is insured2. This means that even if banks fail, the government guarantees depositors will get the $250,000 back. Thus, if you were a Silicon Valley Bank customer that had FDIC insurance coverage, you were not in danger of losing your cash. Here is a summary of the type of coverage by account ownership.
FDIC Deposit Insurance Coverage Limits by Account Ownership Category
| FDIC Deposit Insurance Coverage Limits by Account Ownership Category | |
|---|---|
| Single Accounts (Owned by One Person) | $250,000 per owner |
| Joint Accounts (Owned by Two or More Persons) | $250,000 per co-owner |
| Certain Retirement Accounts (Includes IRAs) | $250,000 per owner |
| Revocable Trust Accounts | $250,000 per owner per unique beneficiary |
In order for banks to receive protection, they must disclose to consumers they are FDIC-insured. If consumers are unsure whether their money is federally insured, the FDIC has a tool to help, The Electronic Deposit Insurance Estimator3. It can help figure out on a per bank basis by account type how much is insured.
Silicon Valley Issue
The rapid loss of confidence in Silicon Valley Bank could be attributable to many deposits being above the $250,000 limit. A recent report filed with FDIC showed that only 5.69% of the Silicon Valley Bank deposits held in the US were insured.4
Effect on Investment Portfolios
The federal agencies have stated that no insured or uninsured deposits will be lost. An exception has been made for uninsured deposits in this case. The pain will be felt by Silicon Valley Bank Financial Group stockholders and debtholders. Losses will be realized and concentrated portfolios with meaningful allocations to these investments will suffer. To the extent these investments were held within a diversified portfolio, the effect should be minimal. This is a helpful investment strategy reminder. We continue to value the power of diversification. Things can unravel quickly at companies before investors can react. A stock can be down 50%, 70%, or 100% in a matter of days or week. The same has not been the case for well diversified portfolios.
Takeaways
For now, it’s important to review two things:
- Current account ownership and
- Current bank balances
Assuming the account balances are within the appropriate limits based on account ownership, you should feel comfortable that the current situation is under control. We continue to advise individuals to worry about the things that are within their control. Ensuring that your applicable bank deposits are appropriately insured falls into that bucket. Please let us know if you have any additional questions about this situation.
1 Federal Reserve Board – Joint Statement by Treasury, Federal Reserve, and FDIC
2 FDIC: Deposit Insurance At A Glance
3 FDIC: Electronic Deposit Insurance Estimator (EDIE)
4 BankFind Suite: Institution Financial Reports (fdic.gov)