The demise of Silicon Valley Bank (SVB) last week was a significant development. SVB’s collapse is the second-largest bank failure in US history, trailing only that of Washington Mutual in the 2008 financial crisis. Its collapse triggered worries that other regional bank failures could follow, worries that were heightened when Signature Bank failed two days later.
SVB was a key financial player in the world of Silicon Valley startups. Its clients included some of the best and brightest technology stars. While we do not know the full story at this point, some details are beginning to emerge.
First, SVB operated with relatively low capital levels and had a reputation for lending standards that were not as strict as some of its competitors. As a result, SVB was fragile to the downturn that has engulfed tech sector stocks over the past year.
Second, SVB paid a relatively high rate of interest on deposits. To help fund the higher interest rates, SVB invested the deposits in longer-term bonds. Since long-term bond prices are more sensitive to changes in interest rates, the Fed’s aggressive rate hikes caused the value of SVB’s bond portfolio to plummet, resulting in big investment losses.
Given SVB’s problems, investors were reluctant to invest new capital into SVB. When the attempt to raise capital failed, depositors pulled their funds prompting authorities to close SVB last Friday. After SVB failed, depositors also started pulling funds from Signature Bank, prompting regulators to intervene to prevent the panic from spreading.
The Federal Reserve, FDIC, and US Treasury issued a joint statement over the weekend confirming that depositors would have access to all their money and have taken measures to prevent further contagion. That action has helped calm the market; however, these bank failures highlight the importance of maintaining your bank balances within FDIC limits. The rules governing FDIC limits are complex. I will give you some basics to get you started, but it is worth having a conversation about them with your financial advisor. More information is available at www.fdic.gov/resources/deposit-insurance.
The Federal Deposit Insurance Corporation (FDIC) was organized by Congress in 1933 to promote confidence in our financial system. FDIC deposit insurance is backed by the full faith and credit of the United States government and covers a broad range of deposit accounts, including checking accounts, savings accounts, money market deposit accounts, CDs, NOW accounts, and cashier’s checks and money orders. FDIC insurance does NOT cover stocks, bonds, mutual funds (including money market funds), life insurance policies, annuities, municipal bonds, safe deposit boxes or their contents, or US Treasury obligations.
FDIC insurance is subject to coverage limits based on something called ownership categories. Ownership categories include single accounts, joint accounts, certain retirement accounts, employee benefit accounts, revocable trust accounts, irrevocable trust accounts, corporations, partnership, and unincorporated association accounts. The standard insurance limit is $250,000 per depositor per account ownership category. Therefore, if you have accounts at an insured bank in multiple ownership categories, your coverage limits can be several times the standard $250,000.
You need to be careful as you work through how much insurance coverage you are entitled to receive. Coverage limits are not always as straight-forward as they might first appear. For example, single accounts are generally the simplest ownership category to work with. A single account is owned by an individual; therefore, one might logically conclude that it would have the standard $250,000 insurance limit. However, the limit is for the total value of all the depositor’s single accounts at a particular bank. If the depositor has multiple types of single accounts (i.e., single checking, single savings, and single CDs), some of those accounts may not qualify for the full $250,000 coverage if the total value of all the single accounts exceeds $250,000.
Single accounts can get complicated in another way. If a depositor sets up a single account with a “payable on death” (POD) feature (meaning it transfers to one or more named beneficiaries on the death of the depositor), then the single account is treated like a revocable trust account for insurance purposes and the insurance limit becomes $250,000 times the number of named beneficiaries.
As I said, FDIC rules are complicated. These examples refer to only one of the eight ownership categories. Work with your financial advisor to make sure you have the coverage you need.
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Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have about investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to smerrell@montereypw.com.