MoneySmart

A Fresh Look at Bank Failures

It’s wise to develop a plan to protect and diversify your assets.

The recent news about bank failures filling the airwaves might be making you wonder if the money you have in a savings and/or checking account—as well as in various other bank products—is safe.

The federal takeovers of Silicon Valley Bank, Signature Bank, and others remind us that even institutions like banks might not always be iron-clad in terms of safety in an uncertain financial world.

The good news is that the typical checking- or savings-account balances that most people keep at a bank are protected through FDIC insurance if the bank fails or files for bankruptcy. But even so, it is important that you know exactly what is and isn’t protected.

How FDIC Insurance Works

FDIC deposit insurance can protect bank customers in the event that an FDIC-insured depository institution fails. The Federal Deposit Insurance Corporation (FDIC) is an independent federal-government agency that insures deposits in commercial banks and thrifts. Federal deposit insurance is mandatory for all federally chartered banks and savings institutions.

As the customer of a bank, you do not need to actually purchase FDIC insurance coverage. That protection is automatic for any deposit account that is opened at an FDIC-insured banking institution.

There are different types of bank accounts that are insured by the FDIC. These include checking accounts, savings accounts, Money Market Deposit Accounts (MMDAs), and Certificates of Deposit (CDs).

The amount of FDIC insurance coverage that you are entitled to depends on your account’s ownership category. This refers to the type of products you have your money in at a bank.  For instance, deposits are insured up to at least $250,000 per depositor, per FDIC-insured bank, per ownership (or account) category.

So as an example, if you have a $200,000 CD and another $25,000 in a checking account at a particular bank, the total ($225,000) would be insured by the FDIC. Should that bank fail, the FDIC would pay you that amount of insurance coverage. In the past, the insurance coverage from the FDIC has been paid within just a few days after the bank has closed.

Your FDIC coverage may be paid out to you in various ways. These can include, but are not limited to:

Providing you with a new account at another FDIC-insured bank in an amount that is equal to your insured balance at the failed banking institution, or

Issuing you a check for the insured balance of your account(s) at the bank(s) that have failed.

Further, if you have money deposited at other FDIC-insured banks, these funds may also be insured up to the $250,000 limit if those banks fail, as well.

Bank Reserve Requirements

A bank’s reserve requirement refers to the amount of money that the bank must keep on hand, as a percentage of its total deposits. This ensures that the bank has enough funds to meet its depositors’ demands, while at the same time providing loans to customers and allowing the Federal Reserve (The Fed) to manage the money supply effectively. So, reserves can, in some ways, be considered like “collateral.”

As an example, regional banks operate within a particular community or region of the country. These are typically smaller than national banks, and because of that, regional banking institutions usually have lower reserve requirements. 

Alternatively, because national banks may operate across the country—or even internationally—they are generally exposed to more risk. Therefore, their reserve requirements are typically higher than those of local or regional banks.

Another key factor in banking is “leverage.” This refers to the use of borrowed funds to invest in assets with the goal of increasing profits. However, while using leverage can certainly help to increase a bank’s profits, using too much leverage can also expose that institution to more risk.

Here again, because national banks are usually larger and more spread out than smaller regional banks, they are subject to more stringent regulatory oversight and have higher capital requirements in order to ensure that they can absorb any potential losses that may occur.

Keeping Your Savings Protected

If your bank-account balances exceed the limits of FDIC insurance coverage, you should consider taking steps to protect those excess funds from a bank failure. One solution could be to diversify some of your money into other investments. There are strategies that offer both diversification and protection, and a qualified financial professional can help you develop a strategy that makes sense for you.

Understanding how and where FDIC insurance works is an essential component of your financial strategy. So is having a financial plan in place that can help you weather various economic uncertainties. If you do not have a specific plan in place for your financial goals, or if you have not updated your plan, it is a good idea to work with a financial-planning professional on both your short-term and long-term goals and challenges.

An experienced professional can help you with your financial goals and guide you on a path toward achieving them. Additionally, working with a financial specialist who is also well-versed in LGBTQ community issues can help you keep your plan updated as laws and regulations change over time.

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Grace S. Yung

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the September 2017 issue of Texas Monthly.
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