If everyone with a Costco membership showed up at the same time to buy the $5 roasted chicken, there would be chaos. The same thing applies to banks.
What happened with Silicon Valley Bank is an old fashioned bank run that most people only recollect in the holiday season when watching “It’s a Wonderful Life.” But it just happened in 2023. Deposits balances can’t meet withdrawals and the bank is forced to close.
But even that explanation is too simplistic. I’m certainly no banking expert to understand all the nuances. But I try to understand people. And people can be fickle. As much as we try to plug every hole with rules and regulations to prevent things like this from ever happening again, our society (and especially banks) is a trust-based system.
And when that trust erodes, it’s hard to stop the landslide.
FDIC Insurance was put in place to try to restore trust in the banking system during chaotic times. Since it’s plastered all over the news, let’s remind ourselves what it is, what it covers, and how to best protect ourselves and our assets.
FDIC insurance protects cash deposits at the bank (checking, savings, CDs, money market, etc). It does not cover the risk of loss in respect to investments (like stocks, bonds, mutual funds, ETFs, etc).
Here’s how FDIC insurance covers you at your bank. Specifically, the coverage has to do with ownership:
|Ownership Type||FDIC Insurance Coverage|
|Individual Accounts (owned by 1 person)||up to $250,000 per owner|
|Joint Accounts (2 or more persons)||up to $250,000 per co-owner|
|Revocable Trust Accounts||up to $250,000 per owner per beneficiary (up to 5 beneficiaries). See below|
|Corporation/Partnership Accounts||up to $250,000 per corporation/partnership|
If you have your money at an FDIC-insured bank, then your money is automatically covered (you don’t need to apply for it).
Example of how this could play out:
Jon Miller & Kathy Miller are married and have accounts at XYZ Bank as follows:
|Jon Miller Individual Account – Savings||$200,000|
|Jon Miller Individual Account – Checking||$50,000|
|Jon & Kathy Miller Joint Account- Checking||$100,000|
|Jon & Kathy Miller Joint Account – Savings||$400,000|
|Jon & Kathy Miller Family Trust||$1,000,000|
Jon’s Individual Account balances would be added together ($200K + $50K = $250K). All of his deposits are insured.
Jon & Kathy’s Joint Account balances are added together ($100K + $400K = $500K). $250K insurance x 2 owners = $500K. All of their deposits are insured.
**Notice that Jon has $250K of insurance on his Individual Account PLUS $250K of insurance on the Joint Account (1/2 of $500K). Remember FDIC insurance is based per ownership type and per institution.
And lastly, Jon and Kathy have 2 kids and a typical revocable family trust drafted by their attorney. The trust states that upon the death of one spouse the assets will pass to the surviving spouse, and upon the death of the last owner the assets will pass to their 2 children equally. This trust’s deposit account would be insured up to $1.0 million. Since each owner names two beneficiaries, the owners (husband and wife) will be insured up to $500,000 each. All of their Family Trust at XYX Bank is insured!
Brokerage Sweep Accounts
Let’s turn our attention from brick and mortar banks to brokerage firms where most people keep their investments they want to grow.
We already know that investments can decline in value so it makes sense there’s no insurance on them (Side note: this doesn’t mean that there’s isn’t insurance at brokerage firms. Brokerage firms carry SIPC insurance. If the brokerage firm goes under then SIPC insurance kicks in to replace your investment holdings).
But what about the cash at those brokerage firms? Are those FDIC insured as well? They are. And actually they may have higher coverage.
Clients of Birchwood Capital keep their investments at Charles Schwab. Each account owns stocks/bonds and also had a bit of cash to for withdrawals, rebalancing, etc. Like most brokerage firms Schwab utilizes a “sweep program.” When you deposit cash into a brokerage account (be that an IRA, Joint Account, or Trust) that cash is swept into a bank. This happens automatically. Once there it earns interest and is covered by that bank’s FDIC insurance.
Better yet, Schwab doesn’t have just one bank that cash gets swept to, it has three. Once cash in an account reaches the FDIC insurance limit for one bank, it starts to fill up a second bank (The exact names of these banks are: Charles Schwab Bank, Charles Schwab Premier Bank, and Charles Schwab Trust Bank).
For example, let’s say you had $600,000 in cash in an individual account: $250,000 would be swept into bank 1, the next $250,000 would be swept into bank 2, and the final $100,000 would be swept into bank 3. Even though the FDIC limit is $250,000 for an individual account, your cash is at 3 different banks so the limit is actually $750,000 in this scenario.
In the case of Jon and Kathy Miller’s Family Trust, if they had a Trust brokerage account at Schwab, their cash would be insured up to $3 million ($1 million insurance x 3 banks).
This is standard practice at brokerage firms, so the capacity for greater FDIC insurance might be larger than what you thought.
Here are your options for maximizing FDIC insurance:
- Re-look at your account ownership. The insurance limits are based on account ownership. Can you open a different account to increase your coverage (like a Joint Account and a Trust Account at the same institution)?
- Put additional excess cash at your brokerage firm. Their sweep program will increase the FDIC coverage.
- Invest cash in short-term treasuries. If you don’t need the money right now, purchasing a treasury security guarantees repayment.
- Open additional accounts at a different bank
Personally, I favor simplicity and try to avoid opening up more accounts at different banks if I can. Instead, I would try to see if there’s a better way to maximize FDIC insurance at my current institutions.