More Than $250,000 in the Bank? Don't Panic - Do This Instead

I started my career as a Big 6 auditor (yes, I'm *that* old) with a focus on the financial services sector.  After 8 long years, I left public accounting to be the CFO of a small, publicly traded bank and then moved on to a project-based role supporting the CFO and Controller of a substantially large thrift which at the time was in the top 100 financial institutions in the US.

In separate events, a few years after I left each financial institution, each was taken over by the regulators. Because of my prior work history with each institution, I closely followed each takeover. Each takeover was shocking in its own right and looking back, there was nothing that I could have done differently to change either company's fate. 

As an outside observer with direct ties to failed institutions, I have learned to not panic when there's a bank takeover. Here's what I learned.

What Happened At Silicon Valley Bank And Signature Bank?

Last week created a wave of fear in the banking system, as people are now worried about the safety of their deposits.  It all started when an unfortunate chain of events led to a bank run at Silicon Valley Bank. Customers rushed to withdraw their funds, causing the bank to become insolvent. This sparked a wave of panic as people are now questioning the safety of their deposits in the banking system. 

Fearing that something similar was about to happen to Signature Bank, Regulators stepped in to take control a few days after taking control over Silicon Valley Bank, citing the need to protect depositors.

Now, almost one week later, the government has guaranteed all deposits at both banks and has created a program to protect other banks from a run on deposits.

What Is The FDIC?

The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by Congress to maintain stability and public confidence in the US financial system. 

The FDIC provides, among many things, insurance for deposits held at banks and thrifts in savings accounts, money market accounts, checking accounts, and CDs, up to $250,000 per depositor, per insured bank, for each account ownership category. This means that, in the event of a bank failure, your money is protected up to a certain degree.

Keep in mind that the FDIC does not insure stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if you buy them at an FDIC-insured bank. Keep this in mind if you have those types of assets at a bank.

What If My Money Is At A Credit Union?

While the FDIC covers banks and thrifts, the National Credit Union Administration (NCUA) is identical to the FDIC but serves credit unions.

No Matter What - Do Not Withdraw Your Money!

Despite the recent events, financial experts do not recommend withdrawing cash from your account. Keeping your money at a bank rather than in your home is safer, especially when it is insured. Even banking clients with uninsured deposits usually get nearly all of their money back.

If My Money Is Safe In The Bank, Why Do I See News Articles Announcing Huge Losses in Pension and 401(k) Funds Because of Silicon Valley Bank and Signature Bank?

Throughout this article, we have discussed how the money you have deposited into a bank or credit union is protected. This is different from the losses being reported in the news this week.

The losses that are being referred to are primarily from retirement funds that purchased the publicly traded stock of the holding company of Silicon Valley Bank and/or Signature Bank as an investment in their portfolio.

Stock market fluctuations are inevitable and happen every day.

Am I Protected?

Deposits up to $250,000 at nearly any bank or credit union are insured by the FDIC or NCUA. Look for the FDIC or NCUA logo at the bank teller's window or the entrance to your bank branch. 

Additionally, you can verify coverage for your bank at the FDIC here or for your credit union at the NCUA here.

The FDIC and NCUA have a strong history of protecting deposits above the cap.

I Am Still Nervous - How Do I Protect My Money In Excess Of The FDIC/NCUA Limits?

Unfortunately, the recent high-profile collapses at Silicon Valley Bank and Signature Bank highlighted the fact that depositors with higher balances could still be at risk. In this case, the Biden administration stepped in to protect all customers, even those with balances exceeding the insurance limit. 

That being said, this level of protection is not standard and depositors should be aware of how much of their money falls outside of the FDIC insurance limit. If you maintain higher balances in your bank accounts, there are options for protecting them.

1. Open New Accounts At Different Banks
   The simplest way to protect your money is to know the FDIC/NCUA limits and spread your money around to different banks and/or credit unions. 
   
   The trade-off to this approach, of course, is that keeping up with multiple accounts at different banks may not be ideal if you prefer a streamlined approach to money management.

2. Open a Cash Management Account 
   Brokerages and nonbank financial institutions may offer access to a cash management account. This type of account functions similarly to a checking account, allowing you to spend or pay bills. It can also be used to protect against excessive deposits.  Cash management accounts with a sweep feature spread deposits across multiple FDIC-insured banks.
   
   For example, if you have $1,00,000 in your cash management account, it could be spread across five banks, with $245,000 in each of four different banks and $20,000 in the final bank. This ensures FDIC insurance protection.
   
   Please note that this benefit only applies to cash, while securities held at a brokerage are covered by the Securities Investor Protection Corporation (SIPC).

3. The Certificate of Deposit Account Registry Service (CDARS)
   Using CDARS can be a great way to save while getting around the FDIC insurance limit of $250,000. When you sign up, your money is divided into multiple CDs issued by different banks that are part of the CDARS network. This ensures that your funds are all insured up to the $250,000 limit.
   
   However, it is important to remember that CDs are time deposits, meaning you must leave your funds untouched until the CD matures. If you need to access those funds earlier, you may have to pay an early withdrawal penalty.
   
4. Alternative Considerations
   If you’re looking to insure deposits of up to $3.75 million, MaxSafe offered by Wintrust is a great option. This program allows you to spread your money across 15 different institutions and there is a $1,000 minimum deposit required. There are no monthly maintenance fees or minimum balance requirements.
   
   The Depositors Insurance Fund (DIF) provides coverage beyond the FDIC’s $250,000 limit at member banks without any forms to fill out.
   
   

Final Thoughts

Although bank failures are rare, it is important to be aware that your funds may not be fully protected if you exceed the FDIC's limits. To close the coverage gap, there are various solutions available. Taking the time to explore all of your options for insuring any extra deposits can help you find the right solution when FDIC protection is insufficient.