The collapse of Silicon Valley Bank left many questioning the safety of their bank deposits and what they can do to protect themselves against a bank failure. In light of this, we wanted to remind you of the protections currently in place and to offer you a “best practice” recommendation when it comes to your cash reserves.
Traditional bank checking and savings accounts have been insured by the Federal Deposit Insurance Corporation (FDIC) [1] since 1933, in response to bank runs during the Great Depression. The FDIC is a special entity that is funded by insurance ‘premiums’ charged to member banks; greater use of the insurance raises the costs to banks. Account protection has been steadily raised with inflation, with the most recent cap in place since 2008—it’s $250,000, per institution, per ownership category. As an example, a husband and wife could be insured up to $1,000,000 if assets were held in respective individual accounts ($250k each), plus a joint account ($500k). Of course, if trusts were included with unique beneficiaries, etc., the limit could increase further. This can be confusing, so the FDIC offers a useful calculator to help determine a depositor’s specific limit. Credit unions aren’t covered by FDIC per se, but have their own system, the NCUA, with the same dollar limit.
While FDIC insurance covers the vast majority of U.S. depositors, amounts over the $250k limit are technically not covered. (Over the past weekend, however, the U.S. Treasury Department, Federal Reserve, and FDIC coordinated to cover all depositors of the affected banks, even those over the official limit. This has been done at times historically when a bank failure’s effect on depositors was deemed to have broader financial system ramifications.) However, to err on the conservative side, it should be assumed that any deposit over $250k is uninsured. To ensure balances stay under this limit, our best practice recommendation is to split deposits between different ownership structures and between different banks, although this can create more paperwork.
This is also a good time to provide a reminder that brokerage accounts are afforded government protections in the event of financial insolvency by the holding firm (custodians like Fidelity and Schwab). These are covered by the Securities Investor Protection Corp. (SIPC) to a limit of $500k per customer (which includes $250k of cash). Note that this represents custodial protection, as the value of underlying stocks, bonds, or other securities are not ever guaranteed.
In addition to SIPC protection, Fidelity also provides "excess of SIPC" coverage through Lloyd's of London2. The total aggregate excess of SIPC coverage available through Fidelity's excess of SIPC policy is $1 billion. Within Fidelity's excess of SIPC coverage, there is no per customer dollar limit on coverage of securities, but there is a per customer limit of $1.9 million on coverage of cash awaiting investment. This is the maximum excess of SIPC protection currently available in the brokerage industry.
[1] FDIC (https://www.fdic.gov/resources/deposit-insurance/index.html) 2 Fidelity (https://www.fidelity.com/why-fidelity/safeguarding-your-accounts
Centered Financial, LLC is a registered investment adviser offering advisory services in the State of California, Utah, Texas and in other jurisdictions where exempted. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques, strategies, or investments discussed are suitable for all investors or will yield positive outcomes. To determine which strategies or investment(s) may be appropriate for you, consult your financial adviser prior to investing. Any discussion of strategies related to tax or legal planning is general and is not intended as tax or legal advice. Please consult appropriate tax and legal professionals for recommendations pertaining to your specific situation.
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