The shocking failures of regional banks such as Silicon Valley Bank and First Republic this past spring may have brought to mind the scene in the movie It’s a Wonderful Life when there’s a run on the Bailey Brothers Building & Loan. Everyone in town rushed to withdraw their savings—but their money was already gone. It was a frightening scenario, and one we all thought was very unlikely. But the collapse and the specter of additional bank failures around the country raises the uncomfortable question, Is my cash safe?
Even though US regulators and policymakers moved quickly to boost public confidence in the banking system after the collapses, jittery savers still yanked more than $500 billion out of small and regional banks and piled that money into government bonds, large global banks that are considered “too big to fail” and money-market mutual funds at brokerage firms.
The bank turmoil is scary, says Nicholas Bunio, CFP. But he also says that we should all take a deep breath. He cautions that moving your cash around may feel like you’re doing something to protect yourself—but it may not make you any safer. In fact, you could be introducing additional dangers such as being unable to get your money when you need it for emergencies or losing your purchasing power to high inflation. To sleep soundly at night, you need to understand the risks of where you are holding your cash and know how to manage it properly for your particular situation.
Here are steps that Bunio is recommending his clients take with their cash to feel safer now…
Banks and credit unions remain, by far, the best places to park cash that you might need at a moment’s notice—just be sure to keep no more than $250,000 in any savings, money-market or other deposit account. Reason: That’s the insurance coverage limit provided by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the US government that protects bank depositors against the loss of their insured deposits. The insurance is funded by FDIC-member banks so it costs you nothing. Since 1933, when the FDIC was created, no depositor has lost a penny of insured deposits. Similarly, if you bank through a federally insured credit union, your deposits are insured at least up to $250,000 by the National Credit Union Administration (NCUA), an entity that is very similar to the FDIC. In the Silicon Valley Bank foreclosure, government regulators took the extraordinary step of making depositors whole for their entire deposits, not just the insured amount of $250,000. But don’t count on that happening in the future. To see if your bank is FDIC-insured, go to Banks.Data.FDIC.gov/bankfind-suite/bankfind…and if your credit union is NCUA-insured, go to MyCreditUnion.gov/share-insurance.
Ways to keep your money safer…
Make sure your bank is financially sound. Even if your money is covered by FDIC insurance, you don’t want to stick with a financially shaky institution. Reason: If the bank fails, it could take several days for your accounts to be reimbursed, and that could create delays with the checks you write, your mortgage and credit card payments, etc. To find out how stable your bank or credit union is, go to BauerFinancial.com. Institutions with five stars have the strongest balance sheets. One or two stars indicates a problematic or troubled bank.
Understand what FDIC and NCUA insurance actually cover. The $250,000 limit is per depositor per bank or credit union account category. What that means: Ownership categories including single and joint accounts and retirement accounts such as IRAs and self-directed 401(k)s, revocable trusts (up to $250,000 per owner per unique beneficiary) and irrevocable trusts (capped at $250,000 per account). So a depositor with two taxable savings accounts at a bank gets only $250,000 of coverage—but a depositor with two savings accounts, one of which is in an IRA, gets $250,000 of coverage for each account. Only certain bank and credit union products are insured. They include checking, savings (statement and passbook) and money-market accounts, certificates of deposit (CDs), cashier’s checks and money orders. What’s not insured: Mutual funds, stocks, bonds, annuities, life insurance policies and cryptocurrency.
Helpful: If you have multiple accounts and products at the same financial institution, determine how much of your money has coverage using the FDIC’s Electronic Deposit Insurance Estimator calculator at EDIE.FDIC.gov and the NCUA’s Share Insurance Estimator at MyCreditUnion.gov/share-insurance-estimator-home.
Maximize FDIC/NCUA coverage at your financial institution. A couple could qualify for $1.5 million or more at one institution. How it works: You and your partner each have $250,000 insurance on accounts for which you are single owners. Your joint account gets another $500,000 worth of coverage ($250,000 per co-owner). And if each of you has an IRA, that’s another $250,000 of coverage each.
Use a deposit swap network if you have high bank-account balances. Savers with hundreds of thousands of dollars could protect their money by opening accounts at multiple banks, but juggling that can be burdensome. Better: Deposit swap networks such as IntraFi Network (IntraFiNetworkDeposits.com) allow customers the insurance coverage of multiple banks while dealing with one bank or credit union. IntraFi works as a custodian for large deposits, spreading them into CDs at its network of banks and making sure each CD—ranging in maturity from four weeks to five years—contains below the federal insurance limit. Downsides: Money in a CD is not accessible until maturity without early-withdrawal penalties. Also, while IntraFi doesn’t charge a fee, you have to use the banks in its network, so you may not get the best CD rates.
Resist the urge to move cash to a too-big-to-fail bank. Yes, big banks have less chance of insolvency because they are more tightly regulated than smaller ones and more likely to receive a government bailout if they run into trouble. But the FDIC coverage limits on your cash are the same no matter how big the bank. Bigger risk: Large banks often offer near-zero yields on your cash, meaning that high inflation eats up your purchasing power. Example: A Bank of America Savings account pays a 0.01% annual percentage yield (APY). On a $50,000 deposit, that’s just $5 annually versus the 5% APY ($2,500 a year in interest) now available at several FDIC-insured online banks.
If you don’t need instant access to cash, these federal government bonds are near-cash alternatives that have the same credit safety as FDIC-insured accounts. Your principal and interest payments are backed by the full faith and credit of the US government. US Treasuries offer other advantages over cash kept in a bank deposit account…
Flexibility. You can buy and sell Treasuries through your bank or broker or directly online at TreasuryDirect.gov.
No dollar limit on how much you can own.
Favorable tax status. Interest income from Treasuries is subject to federal income tax but exempt from state and local incomes taxes.
Higher yields than you can get on bank deposit accounts—a six-month Treasury recently paid 4.7%.
The big danger: Selling your Treasuries before maturity if you need the cash. Even though you are guaranteed to get your principal returned at maturity (provided the US doesn’t default on its debts), the value of your Treasuries can still fluctuate greatly in the interim, which means you could endure losses.
Ways to keep your money safer…
Stick with T-Bills—Treasury bonds with maturities ranging from four weeks to one year. You earn robust yields without tying up your money for a long period. Also, the value of T-Bills fluctuates less than longer-maturity Treasuries. Important: T-Bills are not useful if you need to generate immediate income from your portfolio. Interest you earn on them is paid only at the end of the term.
Brokerage firms are best for holding “cash equivalents”—very low-risk investments such as brokered CDs and money-market mutual funds. They typically offer better rates than you can get on a bank deposit account. The catch: These investments are not protected by the FDIC if they decline in value—but they offer other protections. If your brokerage fails and your assets go missing, the Securities Investor Protection Corporation (SIPC), a nonprofit group that protects customers of more than 3,500 brokerage firms including the major ones, will cover up to $500,000 in securities or a combination of securities and cash. The cash limit is $250,000. Check if your brokerage firm is an SIPC member at
SIPC.org/list-of-members.
Many large brokerages also offer a cash sweep program, in which your cash is swept into multiple partner banks. Money in these cash sweep programs is protected by FDIC insurance. Drawback: Cash in sweep programs typically earns less than optimal interest rates. Example: The yield at the Fidelity sweep account was recently 2.47%.
Ways to keep your cash safer…
Use a “brokered” CD instead of a traditional bank CD. If you can afford to tie up your cash for short periods, CDs offer you a fixed rate of return on your investment over that period regardless of how interest rates fluctuate in the future. Brokered CDs, issued by banks and sold in bulk through brokerages, offer the same insurance protection as bank CDs but higher yields. Example: A six-month CD purchased through the Charles Schwab CD OneSource program recently had an APY of 5.27% versus only 5.01% for the best comparable bank CD in the country. Another advantage: You can own multiple brokered CDs from different underlying banks in your brokerage account and still get $250,000 worth of protection for each CD. Careful: Choose only brokered CDs that are “noncallable” or have “call protection.” The CD issuer can redeem a callable CD prior to maturity, so if interest rates drop, you could be forced to reinvest your money at lower rates.
Use a money-market mutual fund if you are willing to take slightly more risk than with bank money-market accounts in exchange for higher yields. These funds come in taxable and tax-exempt versions and invest your cash in a portfolio of short-term US government debt, municipal debt and/or high-quality corporate debt with short maturities. Upside: Recent yields in the 4%-to-5% range, higher than you can get on most bank deposit accounts…and no limits on how much you can invest. Downside: Even though losses are rare, your money is not guaranteed. While these funds have proven to be reliable—maintaining a steady net asset value at $1/share—their share prices have fluctuated during periods of extreme stress such as the 2008 financial crisis. If a crisis erupts, the funds even can limit withdrawals or charge withdrawal fees for a period of time. Stick with funds at big, well-capitalized brokerage firms such as Fidelity, Schwab and Vanguard.
