Turmoil in the banking sector has justifiably rattled some investors. In a matter of months, three of the four largest bank failures in United States history occurred. While deposits in these banks were preserved by the swift actions of the FDIC, the question remains – are your funds safe?
Given the recent banking turmoil, is your money safe?
If you keep your cash in a Federal Deposit Insurance Corporation [FDIC] member bank, your funds are likely insured against bank failure – up to the applicable limit. The FDIC is a government agency that protects the funds in certain types of accounts up to $250k per account owner at each bank. Covered account types include checking, savings, and money market accounts as well as CDs.
When a bank fails, the FDIC steps in to ensure your funds are returned, up to the applicable limit. To do this, the FDIC could issue a direct reimbursement or facilitate the transfer of your covered funds to a solvent bank.
The FDIC does not cover investments like stocks, bonds, mutual funds, and ETFs. However, these investments are insured by the Securities Investor Protection Corporation [SIPC] – a nonprofit membership corporation. SIPC protects up to $500k in securities, including a maximum of $250k cash, against the failure of an investment company. If you invest your funds with a broker-dealer who fails, SPIC will step in to ensure securities up to the applicable limit are returned to you.
The Differing Structures of Banks and Investment Companies Impact the Safety of Your Money
Banks and investment companies differ in many ways, even in their basic structure. These structural differences play a large role in determining the safety of your funds in uncertain economic times.
The Structure of Banks
In the simplest terms, banks take depositors’ cash, pay them a small amount of interest in return, then lend a portion of that cash to other customers at higher interest rates. This structure also means the bank can use your funds to pay their bills, make loans, and invest as long as they keep the minimum amount of cash on hand – known as their reserve requirement. There are many rules in place to ensure that banks remain solvent, and these are overseen by the Federal Reserve and the FDIC. However, poor management can still lead to insolvency – as evidenced by the recent bank failures.
The Structure of Investment Companies
In contrast to banks, investment companies – specifically broker-dealers – buy and sell securities for their customers. These securities are kept in a separate account in the customer’s name. Since your funds are separated, the broker-dealer cannot use your money or sell your securities for other purposes. Additionally, if the broker-dealer becomes insolvent you still own the securities and cash in your account.
How has 2023 banking turmoil impacted the safety of your cash?
The banking turmoil in 2023 began in March with the failures of Signature Bank and Silicon Valley Bank. Many factors were credited with contributing to the initial bank collapses, including irresponsible investing strategies that failed to effectively prepare for rising interest rates.
After the failures of Silicon Valley and Signature banks, investors began to question the safety of other regional banks. Since the FDIC only insures deposits up to $250k, large depositors began to move their funds from banks they deemed risky. With the outflow of deposits, nervous investors also began to sell. This mistrust contributed to the second-largest bank failure in U.S. history – the collapse of First Republic Bank on May 1.
As of June 5, regional bank stocks were down more than 30% for the year compared to a 12.3% decline in the overall banking sector. This suggests that there may be more regional banking turmoil to come. With the risk of bank failure persisting, it is vital to ensure that your money is safe. To do this, speak with an experienced financial advisor who can review your holdings, identify potential risks, and work with you to minimize those risks.
Discuss The Safety of Your Funds with the Team at Meld Financial
In tumultuous economic times, it is imperative to have a team of tax, legal, and investment professionals to guide you. At Meld Financial, we have spent nearly four decades helping clients achieve their financial goals. This includes balancing the safety of their investments with the returns they need.
Our unique financial planning program, Financial Fingerprint™, takes your situation into account every step of the way. This comprehensive wealth management plan is quick to assemble, easy to understand, and simple to modify as your circumstances change.
To speak with an experienced advisor about the safety of your funds, or to get started with Financial Fingerprint™, contact us today.