Anne Kates Smith
Unless you are well into your nineties or have lived in a country without an established banking system, it’s highly unlikely you’ve ever lost money due to a bank failure. Since the Federal Deposit Insurance Corp. was created in 1933, no bank customer has lost a penny in insured deposits, even during the darkest days of the 2008–09 financial crisis.
But that didn’t prevent some people from worry about keeping their savings safe in March when Silicon Valley Bank failed and regulators assumed control. It was the largest bank failure since the financial crisis, and it was followed by a cascade of unnerving banking news, including the collapse of Signature Bank, the shutdown of Silvergate Capital, and efforts by some of the country’s largest banks to shore up the finances of regional giant First Republic Bank after customers withdrew $70 billion in deposits.
Some savers felt echoes of that worry in August when Moody's downgraded 10 small and mid-sized banks' credit ratings and also said it is reviewing ratings for a number of larger U.S. banks. This caused a stock market reaction and "sparked renewed concerns about the potential for additional bank failures and consolidations," said José Torres, senior economist at Interactive Brokers.
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But unless you have a large amount of money in the bank, that is probably something you can cross off your worry list. The FDIC insures traditional bank deposits — such as checking and savings accounts, money market deposit accounts, and certificates of deposit — for up to $250,000 per depositor, or $500,000 for joint accounts, per bank. The National Credit Union Administration (NCUA) — also a federal agency — provides the same coverage with the same limits for credit unions.
What to do if you’re over the limit
If for some reason you need to stash more than $250,000 in the bank — you just sold a house or small business, for example — there are ways to protect funds that exceed that limit. If you like your bank and want to keep all of your business there, you can boost coverage by setting up multiple accounts that are titled differently. For example, a married couple could have a joint account insured up to $500,000; two individual accounts, each insured up to $250,000; and two retirement accounts, each covered up to $250,000. That would bring their total FDIC coverage to $1.5 million.
Another option is to open accounts at multiple banks because FDIC coverage limits apply per depositor, per bank. This may seem like a hassle, but there are services that will do the work for you. For example, IntraFi will deposit excess funds from checking accounts, money market deposit accounts, and CDs at FDIC-insured banks in its network.
Online banks offer convenience and may pay higher interest rates on savings accounts and CDs than their brick-and-mortar counterparts. But if you’re unfamiliar with an institution, use the tool at www.fdic.gov/bankfind or the NCUA tool at www.ncua.gov to make sure your deposits will be protected. The rise in nonbank financial technology companies has led to some confusion about which customers’ deposits are insured, the FDIC says.
The big picture on bank deposit safety
Bank failures have been relatively rare in recent years, and banking leaders say the recent turmoil doesn’t signal a broader malaise. SVB primarily served technology start-ups and venture capitalists, and more than 93% of its deposits were uninsured. When the bank reported nearly $2 billion in investment losses, word spread quickly on social media, prompting customers to withdraw $42 billion in 24 hours. The panic spilled over to Signature Bank, which served many private and cryptocurrency customers and also had a large percentage of uninsured deposits.
Investors can take comfort in assurances from many market experts that the regional banking panic of 2023 seems unlikely to morph into anything like the great financial crisis of 2008. But the risk of recession is undoubtedly higher, and continued market volatility is a given.
A diminished appetite for risk at regional banks will mean fewer loans, says Mark Haefele, chief investment officer for UBS Global Wealth Management. These banks account for some 50% of commercial and industrial loans, 60% of residential real estate loans, 80% of commercial real estate loans, and 45% of consumer loans. The potential fallout from tighter lending standards is a small-business credit crunch and higher unemployment, he says.
Economists at Goldman Sachs estimate that a lending pullback could trim economic growth by one-fourth to one-half percentage point — equivalent to a similar size rate hike from the Federal Reserve. Goldman raised its forecast of the probability of recession during the next 12 months to 35%, from 25% before the bank troubles. With the banking crisis doing some of the Fed’s work — making economic conditions more restrictive in order to bring down inflation — central bank rate hikes are likely at or near an end.
Advice for investors
Intrepid bargain hunters can pick through the rubble of midsize bank stocks — UBS Securities recommends Western Alliance (symbol WAL), for one — or, with no telling how long this crisis of confidence will last, stick to the largest U.S. banks. Or consider stocks that may have been unfairly penalized, say some analysts, such as Charles Schwab (SCHW). Although its earnings power has likely shrunk some in the near term, “Charles Schwab has enough access to cash and capital to weather the storm in the financial sector,” says Morningstar analyst Michael Wong.
But for most investors, the prudent course of action in an uncertain market with a recession looming is to remain cautious. Focus on defensive assets such as bonds and high-quality shares in general, like those found in exchange-traded fund iShares MSCI USA Quality Factor (QUAL). “Our portfolio recommendations revolve around capital preservation and quality segments of the market that reflect strong balance sheets, robust cash flows, easy access to credit, and diverse product offering,” says Scott Wren, senior global market strategist at Wells Fargo Investment Institute. “The opportunity to take a more assertive posture will come, but now is not the time.”
Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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