Money Monday: When Your Bank is No Fort Knox

3D rendering of a big open round metal safe in a bank depository with money flying out from it, a concept of affluence

How to lay up your treasures faithfully in the midst of a volatile banking climate.

#faithfulfinance

#moneyMonday

It is often intimated, if not inferred that the safest place on the planet to secure your resources is Fort Knox. But then again, they said that nobody could escape from Alcatraz- that is, until they escaped from Alcatraz! No bank or financial institution is 100% guaranteed safe! This means that by now you should realize that banking is about managing risk.

Therefore, you should place your resources in several banks, including those where thieves, rot and moth can’t steal or destroy. Clearly, Silicon Valley Bank (SVB), Signature Bank and Silvergate Capital do not fall into those categories. While it is still early and unfolding story, what lessons can we learn from these recent bank failures?

They have no additional coverage.

Financial Institution Coverage

The Federal Deposit Insurance Corporation (FDIC) insures most consumer depository bank funds. On the other hand, the National Credit Union Share Insurance Fund (NCUSIF) insures most funds which are deposited into a credit union. In general, your deposits are covered up to two hundred and fifty thousand dollars ($250,000).

You may have heard that SVB  specialized in, if you will, lending and catering to start-ups and tech firms.  And you may have heard that the federal government is planning to ensure that those businesses whose deposits exceed $250,000 receive all their deposited funds. But what about you and me, private citizens, non-entrepreneurs or business people, having funds at SVB exceeding $250,000.00 and no payroll? There is no additional coverage beyond $250,000.

What you should know is that not all banks are FDIC insured or covered dollar for dollar on your account. Some banks may have FDIC insurance coverage for only a percentage of your money deposited. For example, a bank may have FDIC insurance coverage of only fifty cents on each dollar. This means that if you have $100,000 dollars in your account, and the bank fails, you will only be insured or covered for up to $50,000 dollars of your $100,000.

Can you afford to lose fifty percent or any amount of your hard-earned bank-deposited funds when most Americans have less than three months of emergency savings in their deposit accounts?

Additionally, what about venture capitalists and other investors? Will they lose money from the bank closure? Even when they lose they win! Losses can be written off on tax returns and they can thereby absorb their profits and eliminate their tax liability.

Bank Run

Perhaps you have heard the phrase or term bank run or run on the bank and have only one visual in mind but let me share another perspective.

A bank run is where many bank depositors, fearing that the institution may become insolvent, simultaneously withdraw all their funds from the bank. There are at least two types of bank runs. The first type of bank run is just like the image  in your mind of people lining up outside the bank waiting to withdraw  their funds. The second kind of bank run is known as a silent bank run. This occurs when depositors, fearing insolvency, execute a bank run by wire transferring their deposits into other institutions they perceive as more financially secure.

Why is some of this happening? Since the Federal Reserve has been raising interest rates to lower inflation, depositors have been withdrawing from banks that pay 0.01 in interest, for example, and then deposit into other instruments like bonds and institutions paying higher rates of interest.

Which accounts are covered?

FDIC insurance covers all types of deposits received at an insured bank, including checking accounts, negotiable order of withdrawal (NOW) accounts, savings accounts, money market deposit accounts (MMDAs), certificates of deposit (CD) and other time deposits, and official items issued by a bank (such as cashier’s checks or money orders). Keep your deposits within these types of accounts.

Which accounts are NOT covered?

FDIC does not insure non-deposit investment products, even if they were purchased from an insured bank. This includes annuities, mutual funds, stocks, bonds, government securities, municipal securities, and US Treasury securities.

Here is an interesting point. The contents of a safe deposit box are not insured by the FDIC. (Make sure you read the contract you signed with the bank when you rented the safe deposit box in the event that some other type of insurance is provided; some banks may make a very limited payment if the box or contents are damaged or destroyed, depending on the circumstances.) Go in and speak with your banker immediately!

Check your coverage

FDIC and NCUSIF-insure accounts under different categories at each financial institution. For example, one category is single ownership of deposit accounts while another is joint ownership deposit accounts. For accounts that are only in your name, the sum of all your deposits at a single institution is insured up to $250,000. If you and your spouse have a joint checking and saving account at a bank, your total coverage for the joint account is $500,000. This would also be in addition to your coverage for any single-owned accounts at the bank. Check on all your bank accounts to avoid being a victim of the next bank robbery.

Other Investments

While I have spent most of this article talking about bank accounts, I would be remiss if I failed to mention something about your other investments such as 401 (k) and Individual Retirement Accounts (IRA).

Securities Investor Protection Corp (SIPC) is a non governmental body which protects your investments and brokerage accounts with a coverage limit of $250,000 in cash, and a total coverage of $500,000 per account. SIPC does not have the power to investigate fraud or take action against brokerage firms. SIPC is not an agency or establishment of the United States Government but is a non-profit membership corporation created under the Securities Investor Protection Act. To the extent your 401(k) plan assets are maintained by a SIPC member, you will be covered for up to $500,000 per account. The law requires brokerage firms to keep their funds separate from those of their customers.

Take Aways

There are potentially some additional banks, small or regional, that are on the watch list for concern. If customers sense liquidity or insolvency issues, they may then want to transfer deposits into the major, big four banks of Wells Fargo, J.P. Morgan Chase, Bank of America and CitiGroup. Transferring deposits into those banks is one thing, but are they really “too big, to fail”?

Next we have the issues of digital currency, stable coins and cryptocurrency. Note that Silvergate Capital closed on March 8, 2023 and operated in digital currency and exchanges. As you consider your next deposit move, will bitcoins become more attractive? Once you’ve analyzed the banking deposits and digital currency, what’s missing will be whether or not Congress will raise the debt ceiling, or will the United States default.

THAT’S WHAT’S UP!

Today’s what’s up is about transferring your credit card balances. If you are carrying high credit card balances and want to switch to a credit card which will provide zero interest rates for the next 21 months, here are two considerations. Bank-Americard is offering no interest on purchases or balances transferred if you qualify. Transfers must be made within 60 days and there is a transfer fee 3%. After 21 months the interest rate ranges from 16.24% to 26.24%. Another card which offers 21 months zero interest on credit card balances is Wells Fargo Reflect credit card. The variable interest rate after 21 months ranges from 17.24% to 29.24%. So if your plan is to get rid of credit card debt in the next 21 months or less, transfer those balances and improve your credit score. And that’s what’s up!

Ruthven R. Phillip, Esq., is a tax attorney, Stewardship and Philanthropy Ministry Assistant, and CEO of Give2Getrich, LLC . Give2Get Rich, LLC 2023. All Rights Reserved. Any distribution or reproduction of part or all of the contents in any form is prohibited.

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