Worried About Your Bank? Here's How To Put Your Money Somewhere Safer And Earn Interest
- Many investors are reassessing their cash holdings after a series of bank failures. Here is what depositors can do to safeguard funds and potentially earn more interest as well.
What Happened to Silicon Valley Bank?
Silicon Valley Bank was a large specialty bank focused on the venture capital industry. It was a relationship bank that focused on providing services to corporations and high-net-worth individuals in industries such as technology and biotech.
The bank grew tremendously in recent years thanks to the boom in venture capital. This left the bank with a ton of new deposits which were subsequently invested by the bank into low-yielding bond securities. These bond securities lost a dramatic amount of value when interest rates surged over the past 18 months. Meanwhile, the bank saw much of its deposit base leave as the fortunes of the venture capital sector faded. All this led to Silicon Valley Bank having a gap in its balance sheet which it was unable to fill.
Government regulators ultimately seized Silicon Valley Bank late last week. While shareholders of the bank are likely to lose most or all of their investment, the government backstopped all the depositors of the bank, including those who were over the traditional FDIC bank insurance limit.
What Is The FDIC? What Does It Do?
The Federal Deposit Insurance Company (FDIC) is a U.S. government agency that was created in 1933 as a result of the systemic bank failures that occurred during the Great Depression.
The FDIC functions by collecting premiums from member banks. These serve as a backstop to guarantee the accounts of all accounts at FDIC-insured banks up to a given threshold, currently $250,000. This insurance applies to:
- Checking accounts
- Savings accounts
- Money market accounts
- Negotiable Order of Withdrawal accounts
- Certificates of deposit (CDs)
- Cashier's checks, money orders, and other official items issued by a bank
The guarantee applies to all U.S. bank accounts, regardless of the citizenship or residency of the account holder.
In the event of a bank failure, any FDIC-insured account will be made whole up to the $250,000 limit. No depositor has ever suffered a single dollar of losses in an FDIC-insured account since the institution began operations.
What Happens If You Have More Than $250,000 In The Bank?
In the event that a bank fails and a depositor has more than $250,000 there, the excess funds typically become a claim against the bank. When the bank's assets are liquidated, the bankruptcy estate will pay off all unsecured creditors, including anyone with deposits over $250,000, to the extent that funds are available. Often, large depositors will ultimately get most or all of their funds back, but there is uncertainty and potentially a large delay before that happens. For that reason, it's often wise to avoid having uninsured deposits at a bank in case something bad happens.
As it pertains to the current bank run, the FDIC used emergency measures to backstop all deposits, including those from uninsured accounts, at SVB and Signature Bank.
This has seemingly led to the idea of an implicit backstop for deposits over $250,000, at least until the current crisis of confidence runs its course. That said, it's important to note that the FDIC has not explicitly changed its policy or guarantee standard, and any depositors with more than $250,000 are still running a risk of losing some of their funds in the event of a bank failure.
Should I Take Money Out Of My Bank?
For depositors that are under the FDIC-insured fund limit of $250,000, there shouldn't be any need to withdraw funds from the bank. As mentioned, the FDIC guarantee has never failed depositors in its 79 years of operation to date. The security of bank deposits is a core pillar of the U.S. financial system, and the government can be expected to support it at virtually all costs.
For depositors with funds in excess of the insured limit, however, it could be prudent to consider other options for those excess funds.
Where Is The Safest Place To Put My Money Right Now?
There are a variety of secure places to keep funds. These include:
- Savings, checking, or money market accounts (up to $250,000 per bank)
- Certificates of Deposit (up to $250,000)
- Brokerage accounts (up to $250,000, see below)
- Treasury bills and bonds
- Treasury bond ETFs
There are plenty of other assets with very low levels of risk, however those five are great options for complete assurance.
How To Compare Treasury Bond ETFs
One of the best options for large amounts of money are treasury bond ETFs, as these can be more simple than setting up many bank accounts to park a large amount of cash.
Seeking Alpha has a listing of bond ETFs out there for comparing the options among various options in treasuries, municipals, and other types of bonds. As government bonds tend to be fungible and offer the same yield for a given duration, investors typically focus on fees as the deciding point between various treasury ETFs. In market conditions like this, liquidity and bid/ask spreads are also worth considering.
Is It Safe To Keep Cash In A Brokerage Account?
Brokerage accounts have insurance of up to $500,000 through the Securities Investor Protection Corporation (SIPC). This includes coverage for up to $250,000 of uninvested cash. Investors have total protection of funds up to this level. Beyond that, more caution may be warranted depending on the brokerage and types of account.
Also note that some brokers carry supplemental insurance in addition to the government guarantees. Charles Schwab, for example, carries insurance on its client assets through Lloyd's of London which lifts the overall amount of guaranteed cash to $1,150,000. That should be a relief for customers who have been worried about Charles Schwab's liquidity situation in recent days.
Does Uninvested Brokerage Cash Earn Interest?
This varies by the brokerage and the general interest rate environment. In general, however, brokers tend to pay very low interest rates on idle cash.
This is, in fact, a significant part of the brokerage business model. Especially since brokers have stopped charging commissions for many types of trades, they have turned to other sources of income. One of these is through using client funds to buy higher-yielding investments and earning the difference as profit. A broker, for example, might pay the account holder just 0.5% on idle cash while buying a 5% yielding bond, earning 4.5% for itself.
However, brokerage account holders that are aware of this can replicate the trade and earn that interest for themselves instead of letting it go to the broker.
Various options such as treasury bills, government bond ETFs, or money market accounts can be accessed within brokerages and tend to pay much higher interest rates than just leaving the funds in plain cash.
What Is A Good Return On A Safe Investment?
This depends on the precise definition of the word safe. Generally, investors use the yields on government bonds as the benchmark for a risk-free investment. Details on these can be found in Seeking Alpha's bond section.
Click on a given duration to see the yield available for a U.S. government bond of that length. As of this writing, for example, government bonds are yielding the following:
- One Month: 4.5%
- Three Month: 4.9%
- One Year: 4.6%
- Two Year: 4.4%
- Five Year: 3.9%
These yields can be obtained, at no risk, by lending to the U.S. government for that length of time.
Generally, bank certificate of deposits are closely tied to these rates, while potentially offering a slight premium depending on the bank. CDs are guaranteed up to the standard FDIC limits.
There are higher yields on other fixed income products, such as investment grade corporate bonds, but these carry credit risk. For a risk-free fixed income investment, available yields are currently generally in the 4-5% range.
Advantages Of Diversification
One strategy that tends to pay dividends across all types of investing and finance is diversification. Investors will rarely go wrong from broadening their exposure to a wider range of options.
In the case of banks specifically, for example, depositors could have saved themselves a lot of trouble by holding funds at multiple institutions. Someone with $1 million at, say, Silicon Valley Bank had a fraught weekend waiting to see if their funds were safe or not. Whereas if that money had been split into several $250,000 buckets held in checking accounts across multiple banks, there would have been much less to worry about.
Similarly, many financial firms got into trouble from putting too many of their eggs in one basket as it relates to fixed income securities. When interest rates changed abruptly, this led to massive problems.
As it relates to personal finance, a combination of FDIC-insured checking accounts, money market accounts, bond ETFs, and treasury bills could offer both higher interest rates and more financial security than putting everything in just one of those options.
This article was written by
Ian worked for Kerrisdale, a New York activist hedge fund, for three years, before moving to Latin America to pursue entrepreneurial opportunities there. His Ian's Insider Corner service provides live chat, model portfolios, full access and updates to his "IMF" portfolio, along with a weekly newsletter which expands on these topics.