FDIC Proposes Increase in Insured Limits for Checking Accounts
What the Silicon Valley Bank Collapse Means for your Personal Finance Situation
If you’ve flipped on the news recently, there’s been a lot of coverage about the collapse of Silicon Valley Bank (SVB). What does it mean for you and your personal financial situation?
In early March, regulators shut down and took over Silicon Valley Bank, a major lender for startups that is well-known in the venture capital and technology industries. Although a bank failure can be frightening, particularly for those who recall the 2008 financial crisis, its consequences on individuals may be limited.
If a bank fails and an individual’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC), the FDIC steps in as the receiver of the failed bank. The FDIC pays depositors the insured amount, up to the $250,000 limit, for each account ownership category. In some cases, the FDIC may arrange for another bank to assume the deposits of the failed bank, so customers can continue to access their funds without interruption.
There is growing support for raising the $250,000 FDIC insurance cap on bank deposits. Advocates for raising the cap say it will stabilize the banking system and prevent future bank runs. But some believe a sweeping deposit guarantee would encourage banks to engage in riskier behavior with customers’ money and might reward irresponsible behavior. Bloomberg reported a coalition of mid-sized U.S. banks sent regulators a letter asking the FDIC to expand its insurance to cover all bank deposits for the next two years to help restore confidence in the banking system. While no changes have been made yet, lawmakers and officials are also exploring the possibility of raising the insurance limit.
What does this mean for you, the economy and your portfolio? The Adams Brown Wealth Management team shares their insight into the situation and common questions from clients.
Q: Will tax dollars pay for a higher cap?
A: If the FDIC decides to raise the insurance cap, banks may increase fees to cover the cost of the higher premiums they will have to pay. This means consumers may indirectly bear some of the cost of a higher cap, but it differs from taxpayers directly funding it.
However, if a bank fails and the FDIC does not have enough money in its insurance fund to cover the losses, the FDIC may borrow money from the U.S. Treasury, which taxpayers fund. This happened during the 2008 financial crisis when the FDIC borrowed $45 billion from the Treasury to cover losses from bank failures.
Q: What does it all mean for the markets and the economy?
A: Many investors may be tempted to react in the wake of both the SVB’s financial troubles. After all, the unprecedented events of last week would test the mettle of even the most seasoned investor. The broad equity markets have only experienced a modest decline following the SVB collapse, which is a positive sign. While the situation may change in the coming months, the current stability suggests that markets are holding up reasonably well.
Stocks rallied on a favorable March consumer inflation report, only to falter after the release of the Federal Open Market Committee meeting minutes, which hinted at a potential recession later this year.
This situation emphasizes the importance of diversification in an investment portfolio. An investment in a single company or industry can cause significant short-term losses, which can harm your portfolio. For long-term investors, diversifying across styles, regions, sizes and sectors can reduce the risk of catastrophic losses caused by a few companies dragging down the portfolio. Short-term traders may be willing to take big risks and lose, but long-term investors should focus on building a broadly diversified portfolio. In such a case, investors should be asking themselves what kind of investor they want to be.
Q: What should account holders do?
A: Removing all deposits from the bank certainly isn’t the answer. You should regularly monitor account balances and activity to ensure they are accurate and up-to-date. You should also review your account statements carefully and immediately report any unauthorized transactions or errors to your financial institution.
Additionally, consult with your financial advisor about spreading your deposits across multiple FDIC-insured institutions to maximize your insurance coverage. This is especially important for those with large deposit balances that exceed the standard insurance limit of $250,000 per depositor, per institution.
Finally, it’s a good idea to periodically review the FDIC’s rules and regulations regarding deposit insurance coverage to stay informed about any changes or updates that may affect your accounts.
Lawmakers have begun talking, but action has yet to be taken. It’s important to remember FDIC insurance is not a substitute for careful financial planning and investment. By following basic FDIC guidelines and working with a trusted advisor, depositors can make informed decisions about how to protect and grow their wealth. Contact an Adams Brown Wealth Consultant to discuss your unique individual situation.