These last few weeks have been wild, haven’t they?
Two of the largest bank failures in US history occurred over a single weekend. And many would say the failures were largely preventable.
First – Silicon Valley Bank was in the news as having failed and a takeover by the FDIC was in process on Friday, Mar 10th. That started a frenzy of news, some real and some overblown, about other banks that were, would, or may fail in the days following SVB.
Next – Signature bank quickly followed in SVB’s footsteps and was taken over that same weekend by the FDIC with support from other government agencies.
Some good news for the depositors at SVB: their deposit accounts were fully backed by the FDIC, even for amounts well over the FDIC limits. The good news is that it calmed some of the panic in depositors withdrawing funds from regional banks. The bad news is that it may be creating a “moral hazard” by setting a precedent of bailing out depositors in a way that continues to encourage risk-ignoring behavior.
We can address the greater context of “how it got here and how it could have been prevented” at another time, but for now, we’d like to address how it could impact you and what you can do about it.
Generally, as a depositor at a bank, you are entitled to $250,000 of FDIC coverage per separately titled account. Fortunately or unfortunately – this is enough coverage for the vast majority of individuals with bank accounts. Unfortunately, those who are over the $250,000 limit per depositor, per account type, and per bank are being put in a situation that is awkward to manage. This is a circumstance that many of our clients, particularly successful small business owners, find themselves in with their banking relationships.
If you don’t have over $250,000 in cash in any bank, then you may only want to pay attention to the “yield” section below.
If you do, or will soon, have more than $250,000 at a bank, then what follows are some great tips to get extra protection and extra “risk-free yield” on dollars that you consider “short-term savings” or are earmarked for near-term spending.
Here is the simple version of what to pay attention to:
a. $250,000 per depositor (per account titling) per depository institution
a. You want to make sure, given the same FDIC coverage available at different banks, that you seek the best “risk-free yield.” High-yield online savings accounts carry the same (or sometimes greater) FDIC limits and generally pay MUCH more interest on those deposits.
b. The typical “local/brick & mortar” bank is paying less than 0.10% on deposit accounts. The typical online high-yield savings account is paying 3.6%-4.0%. See below for examples of high-yielding accounts.
3. Account types and increasing protection
a. You can increase your coverage through usage of Joint Accounts, POD designations, corporate accounts, trust accounts, IRAs, and by spreading assets at multiple banks.
a. Have some cash “stashed” at home that is immediately available and accessible.
b. Have some cash in at least two banks in the event one is temporarily unavailable due to an FDIC takeover.
Although each depositor is only covered by $250,000 FDIC insurance at each bank, there are numerous ways to get more coverage.
Below we address a more in-depth explanation of FDIC coverage and some creative ideas to get more coverage while keeping life as simple as possible.
Three main ways to increase coverage:
1. Find a bank that “bundles FDIC coverage with partner banks” – that also happen to pay high yields on cash.
a. There are online banks such as Brex (for businesses) or Betterment.com (for individuals) that provide extra FDIC coverage per depositor.
ii. Brex.com provides up to $2.25 Million in FDIC coverage per depositor with their partner banks. The current yield on cash is roughly 4.2% as of 3/29/23
b. Sometimes local brick-and-mortar banks offer a CDARS program that works with partner banks to spread out your cash (your bank is the intermediary) and provide you with more coverage with only a single bank point of contact. While this can make acquiring more coverage easier than opening accounts at various banks, there also generally is a large sacrifice of risk-free yield to achieve this coverage.
2. Adjust titles/ownership of your accounts.
a. An account titled solely in the name of one person (depositor) is covered for $250,000 at a single bank. An account titled jointly in the names of a married couple would be eligible for double that coverage, or $500,000.
b. Adding a bank account owned by a revocable trust, an irrevocable trust, an employee benefits account, or an IRA achieves up to an additional $250,000 per differently titled account.
c. Also, an individually owned “POD” designation account would create up to another $250,000 of coverage (if you already had another account using up your individual $250,000 coverage). This can be done by telling your bank, “I would like to add a POD (payable on death) designation to my account”. They would then have to add it to the signature card to update the beneficiary designation. This effectively creates a “simple revocable trust” for that account as long as it exists at that bank. This “differently titles” the account apart from your other individually owned account and thus creates additional FDIC coverage.
i. In fact – if you listed multiple individuals in your POD designation, it seems you can get an additional $250,000 per beneficiary named, per bank. For instance, if you listed five beneficiaries as PODs on your individually owned bank account, you would get $1,250,000 coverage (5 X $250,000) on that account
3. Spread around money to various banks.
a. Another option is to open accounts at various banks online or around town. Again – the “risk-free yield” is much better at online banking options due to their ability to avoid significant “brick and mortar” fixed costs of maintaining physical branches. Also, online accounts tend to be much easier to set up and transfer money between to properly spread out your deposits. As the old saying goes – “let your fingers do the walking.”
This piece is intended to be as current and accurate as possible, but it is informational and educational in content and cannot be guaranteed to be accurate or completely up to date. Always check with the FDIC’s own website or your bank for current guidelines related to your specific situation.
FDIC Simple Brochure:
FDIC Detailed Explanations:
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