FORECASTS & TRENDS E-LETTER by Gary D. Halbert
IN THIS ISSUE:
- Recent Bank Failures Have Large Investors Concerned
- How Does FDIC Deposit Insurance Work?
- How Can You Insure More Than $250,000
- Could The Fed Have Saved Silicon Valley & Signature Banks?
Overview – Recent Bank Failures Have Large Investors Concerned
With the high-profile failures of Silicon Valley Bank (NASDAQ:SIVB) and Signature Bank (NASDAQ:SBNY) in New York earlier this month, many large investors are now concerned about their money parked at US banks, especially those with more than $250,000 at any one financial institution.
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As you know, the Federal Deposit Insurance Corporation (FDIC) insures deposits at most banks – up to $250,000. The National Credit Union Administration insures deposits at most credit unions – also up to $250,000 per individual depositor.
The question is: What happens to depositors who have more than $250,000 at one financial institution. The simple answer is that deposits above $250,000 at any one financial institution are at risk of loss should the bank or other financial institution fail.
In the case of the latest bank failures, the FDIC stepped in and promised to return all assets of depositors, even those in excess of $250,000 at one of these financial institutions, but this may not always be the case. Treasury Secretary Janet Yellen warned as much last week.
As such, investors with more than $250,000 at any one financial institution should seriously consider taking steps to make sure they don’t have more than $250K at any one bank, savings and loan, credit union, etc.
How Does FDIC Deposit Insurance Work?
There are two main types of deposit insurance:
- The Federal Deposit Insurance Corporation insures deposits at most banks.
- The National Credit Union Administration insures deposits at most credit unions.
Deposits are insured up to $250,000 per depositor, per ownership category, per institution. These examples illustrate how that works:
- You and your spouse have individual savings accounts at the same bank, each with $200,000 deposited. You're fully insured because your accounts have different depositors – you and your spouse.
- You have two checking accounts at two different banks, each with $200,000 deposited. You're fully insured because your accounts are at two different institutions.
- You have a personal account and a business account at the same bank, each with $200,000 deposited. You're fully insured because your accounts are in different ownership categories – personal and business.
- You have two individual personal checking accounts at the same bank, each with $200,000 deposited. You're insured only up to $250,000 because both of your accounts have the same depositor, ownership category and institution.
When it comes to living trusts, however, FDIC coverage is calculated differently than most people expect. The $250,000 limit applies per beneficiary, per grantor. For example, if two spouses have two children and each parent has set up a trust for each child, coverage would extend to $1 million.
The math is: $250,000 from the father for Child 1 and another $250,000 for Child 2, then $250,000 from the mother for Child 1 and another $250,000 for Child 2.
How Can You Insure More Than $250,000
The $250,000 limit may sound high, but there are some common situations when people may have more cash in a bank, such as if:
- You sold your home.
- You're saving to buy a home.
- You received an inheritance.
- You own a business.
- You sold a business.
- You're repositioning investments before retirement.
- You're retired.
- You have trust accounts.
Here are four ways you may be able to insure more than $250,000 in deposits:
- Open accounts at more than one institution. This strategy works as long as the two institutions are distinct. To confirm that, check their FDIC certificate numbers, which are unique to each bank.
- Open accounts in different ownership categories. Examples of categories include single, joint, retirement account, trust, business, employee benefit plan and government. Accounts may need to meet certain requirements to be covered.
- Use a network. Networks are designed to help depositors insure large sums. For example, IntraFi Network Deposits divides big deposits into demand deposit accounts, money market deposit accounts and certificates of deposit at FDIC-insured banks, and a MaxForBusiness.com checking account allocates deposits among FDIC-insured banks to try to maximize interest earnings. Services like these may involve fees.
- Open a brokerage deposit account.
Most large brokerage companies offer FDIC-insured bank accounts.
An FDIC brokerage cash account will keep your money federally insured, and since it's linked with a brokerage house, you can easily execute trades into the market, if you so choose.
The Securities Investor Protection Corp. insures securities held in investment accounts up to $500,000 with a $250,000 limit for cash. This insurance doesn't protect you from investment losses, but it steps in if your brokerage company fails.
Finally, FDIC deposit insurance does NOT cover: stock investments, bond investments, mutual funds, life insurance policies, annuities, municipal securities, crypto assets, safe deposit boxes or their contents, US Treasury bills, bonds or notes.
Could The Feed Have Saved Silicon Valley & Signature Banks?
Most Americans paid little attention to the recent failures of Silicon Valley Bank and Signature Bank largely because the FDIC stepped in, took over the banks and made all of their depositors whole. It was like it never happened. But there is more to the story.
On March 10, the Federal Deposit Insurance Corporation announced it would take over Silicon Valley Bank, a 40-year-old institution based in Santa Clara, CA. The bank’s failure is the second-largest in US history and the largest since the financial crisis of 2008.
The move put nearly $175 billion in customer deposits under the regulator’s control. While the swift downfall of the nation’s 16th largest bank evoked memories of the global financial panic of a decade and a half ago, it did not immediately touch off fears of widespread destruction in the financial industry or the global economy.
Silicon Valley Bank’s failure came two days after its emergency moves to handle large withdrawal requests and a precipitous decline in the value of its investment holdings shocked Wall Street and depositors, sending its stock careening. The bank, which had $209 billion in assets at the end of 2022, had been working with financial advisers until Friday morning to find a buyer.
A financial contagion appeared to spread through parts of the banking sector, prompting Treasury Secretary Janet Yellen to publicly reassure investors that the banking system was resilient.
Silicon Valley Bank had been a huge success over its 40-year run and was flush with cash in the decade prior to its demise. But Silicon Valley Bank did what all banks do: It kept a fraction of the deposits on hand and invested the rest with the hope of earning a return. In particular, the bank put a large share of customer deposits into long-dated Treasury bonds and mortgage bonds which promised modest but steady returns when interest rates were low.
That had worked well for years. The bank’s deposits doubled to $102 billion at the end of 2020 from $49 billion in 2018. One year later, in 2021, it had $189.2 billion in its coffers as start-ups and technology companies enjoyed heady profits during the pandemic.
But it bought huge amounts of bonds just before the Federal Reserve began to raise interest rates a little more than a year ago, then failed to make provisions for the possibility that interest rates would rise very quickly. As rates rose, those holdings became less attractive because newer government bonds paid more in interest.
That might not have mattered so long as the bank’s clients didn’t ask for their money back. But because the gusher of start-up funding slowed at the same time as interest rates were rising, the bank’s clients began to withdraw a lot more of their money.
To pay those redemption requests, Silicon Valley Bank sold off some of its investments. In its surprise disclosure on March 8, the bank admitted that it had lost nearly $2 billion when it was all but forced to sell some of its holdings.
Due to rapid inflation beginning in the middle of 2021, the Fed began raising interest rates quickly in 2022 after holding them near zero since 2020. Today, the effective Fed Funds rate is 4.57%. This sudden reversal is the reason the market value of SVB’s securities began to plummet.
In my view, the Fed made it clear enough it was going to raise its Fed Funds rate to counter rising inflation, but apparently Silicon Valley Bank and others didn’t take the warning seriously enough. Some argue the Fed should have encouraged firms like SVB and others to take measures to protect their holdings by using interest rate futures to hedge their portfolios, but that is not the Fed’s responsibility.
As a side note, I started my career in 1975 working for one of the largest commodities firms in the world. I quickly became a hedging specialist. We hedged everything that posed any risk to us. No exceptions. Obviously, that was not the case at SVB and Signature where they left themselves wide open to interest rate exposure.
Finally, some argue the Fed could have saved SVB and others had it simply better communicated its intentions. I would counter that the Fed made its intentions clear and firms like SVB and other should have been more proactive in hedging their portfolios.
They didn’t and had to be bailed out. The question is: Are there more bank failures to come? The answer is: We don’t know.
We’ll see how this plays out in the weeks and months ahead. I’ll leave it there for today.
Very best regards,
Gary D. Halbert
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