Bank Failures and Lessons for Cash Management
In the wake of the latest banking crisis, wealthy investors and family offices are being forced to rethink their cash strategies. The collapses of Silicon Valley Bank, where ninety-four percent of domestic deposits were not insured, and Signature Bank a few days later, with ninety percent uninsured, were a wakeup call. The FDIC deposit insurance limit, capped at $250,000 per depositor per bank, is far lower than the average deposit size at SVB, estimated at more than $4 million per depositor. While the Biden Administration has guaranteed to make all depositors at both SVB and Signature Bank whole, faith in the banking system has been rattled and there are other banks (almost 190 in the US according to this study) that are particularly vulnerable.
According to wealth advisors, the wealthy are moving their money out of bank cash balances and into other low risk, short-term, cash-like investments, like Treasuries and money market mutual funds – these are securities rather than deposits so aren’t covered by FDIC insurance, but in times of banking uncertainty have the advantage of being held in custody rather than sitting in a deposit account. This distinction is important as assets held in this way do not become assets or liabilities of a bank and remain property of the account owner in the case of a bank failure. With today’s higher interest rates, these vehicles may almost double the returns of checking or savings accounts, with four to five percent returns – albeit with more investment risk than typically associated with bank deposits during periods of financial stability. These assets are covered by the Securities Investor Protection Corporation (SIPC), which protects accounts up to $500,000, (including a $250,000 limit for cash) – the protection doesn’t apply to investment losses, but rather the potential loss of the assets themselves. Careful diligence should also be made on the financial controls in place for brokerage and custodial accounts before deciding to make this transition.
Perhaps the best takeaways from today’s financial landscape are (1) ask your bank or financial advisor how your cash is being deployed and whether you will have access to your funds if something happens to the bank, (2) mitigate risk by spreading your cash across multiple banks and/or brokerages to maximize insurance coverage, and (3) consider converting cash to low risk securities like Treasuries and money market mutual funds. In selecting banks, make one of them a large money center bank as an added step for protection. As Benjamin Franklin famously said, “An ounce of prevention is worth a pound of cure.”