What Happened at SVB: FDIC Coverage Update

You probably heard about the collapse of Silicon Valley Bank (SVB), which was taken over by regulators who appointed the Federal Deposit Insurance Corporation (FDIC) as the receiver (custodian) of SVB on Friday, March 10. It is the second-largest banking failure in history and the largest since the financial crisis in 2008. 

Our purpose in writing this is to remind you of the Federal Deposit Insurance Corporation's (FDIC) insurance limits on deposits in an FDIC-insured bank or savings association. We do not believe there is any systemic risk in the banking system – it has actually been well capitalized in the aftermath of the 2008 financial crisis – however, (there's always a caveat!) the prudent response to the SVB scenario is for you to review the FDIC insurance rules. If you have more on deposit than the insurance limits, you should take the necessary steps to diversify your risk by spreading your deposit assets into other FDIC-insured banks and savings associations, staying below the FDIC-insured maximums in each institution. Keep in mind, FDIC insurance is backed by the full faith and credit of the United States Government, so you should not worry about having cash in a smaller bank or savings association as long as it is FDIC-insured. The FDIC insures deposit products, including savings and checking accounts, money market deposit accounts, and certificates of deposit, and in the 90-year history of the FDIC, no one has lost a cent of their insured deposits.

Please keep in mind that FDIC coverage is specific to banks and savings associations; it does not apply to investment accounts held at financial institutions. Additionally, what transpired at SVB is fairly specific to its customer base (a concentration of tech start-ups and other tech firms), and its demise was driven by a run on the bank after venture capitalist Peter Thiel advised his portfolio companies to relocate their banking to other financial institutions. In today's news-travels-at-warp-speed world, this led to a stampede of deposits going out the door (reportedly $42 billion worth in a 24-hour period), leading to the FDIC takeover of the bank. 

U.S. Treasury Secretary Janet Yellen made the following statement Sunday morning: "I've been working all weekend with our banking regulators to design appropriate policies to address this situation. I can't really provide further details at this time. But, what I do want to do is emphasize that the American banking system is really safe and well-capitalized, it's resilient." Yellen, Federal Reserve Chairman Jerome Powell, and FDIC Charmain Martin Gruenberg released further comments Sunday evening:

“Today, we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system... After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13... We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. Finally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.”

Read the Treasury’s full Sunday (March 12) evening statement HERE.

Here’s a quick rundown of some of the questions that may be coming to mind:

1. What is the FDIC? The FDIC was established as part of the Banking Act of 1933 following the Great Depression. Its main purpose is to restore public confidence in banks by guaranteeing customer deposits should a bank fail. The FDIC uses its own funds from premiums paid by member banks as well as borrowing from the U.S. Treasury Department to cover losses if needed. Since its inception, the FDIC has been largely successful in protecting customer assets, having had only five failures since 2010 that were deemed "too big to fail" and required government intervention. In addition to providing customers with an added layer of protection, FDIC insurance also helps increase access to credit by ensuring banks have enough capital on hand so they can offer loans and other services. Having adequate capital also helps reduce risk for investors and lenders who entrust their money with these institutions. FDIC coverage is a form of insurance that protects depositors of financial institutions in the event of bank failure. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per depositor, per institution, meaning if a bank fails, customers' deposits up to the insured amount will be returned. This provides customers with a sense of security and encourages them to maintain their accounts with FDIC-insured banks and other financial institutions.
   
2. How does this impact me? A bank is required to disclose whether or not it is FDIC-insured. We recommend using the FDIC’s tool to determine if you currently have any money that exceeds FDIC coverage limits: Electronic Deposit Insurance Estimator. FDIC Insurance works by ownership categories – four of the most common being individual, joint, retirement, and trust – and each category is separately insured for up to $250,000. Here is a simple summary of how the FDIC insurance coverage works in practice for a married couple:

• Husband has $250,000 in individual accounts.
• Wife has $250,000 in individual accounts.
• Husband and wife have $500,000 in joint accounts.
• Husband has various retirement certificates of deposit (CDs) for $250,000 (for example, CDs held in a retirement account opened at a bank).
• Wife has various retirement certificates of deposit (CDs) for $250,000 (for example, CDs held in a retirement account opened at a bank).
• Husband establishes a revocable trust with the wife as the primary beneficiary for $250,000.
• Wife establishes a revocable trust with the husband as the primary beneficiary for $250,000. 

In this example, the total FDIC insurance coverage would be $2 million, meaning if the bank where these accounts are held fails, all of these funds held by the husband and wife would be fully insured and regained by the couple.

Overall, we see this as a beneficial reminder to check in on your coverage on any accounts held at banks. Please do not hesitate to reach out with any questions or want for guidance in determining your coverage and any potential gaps in coverage that you may have identified.

Questions and/or interested in how this applies to your financial life?

Email us here: info@afsfinancialgroup.com.