How our world can change overnight! Unless you have been backpacking in the wilderness, on a retreat, or have given up social media, tv, cable, radio, and newspapers, you must have heard or read about the disasters that struck the financial industry last week.
Silvergate Bank in California opted to close while Silicon Valley Bank and Signature Bank collapsed and were taken over by federal regulators. Eleven competitor banks rescued First Republic Bank.
Overseas, the process to rescue Credit Suisse appears to also come from a competitor. Almost every one of us has been affected in some way, whether we know it or not.
If you are invested in stocks, you know that the market took a hit and not only financial stocks. In general, the market does not like unknowns and there are some very big unknowns currently. Every mutual fund and exchange-traded fund company quickly dissected their exposure both to the affected company’s stock but also to sectors of the economy most likely to experience consumer changes.
Because of the need to stabilize the financial sector and calm investor fears, the Federal Reserve is expected to “rethink” its plan to raise interest rates this month and may have to delay the eventual lowering of rates down the road. That will affect anyone taking out a loan, refinancing, or renegotiating loan terms.
One very good effect of the chaos is that consumers have become aware of the insurance coverage of banks, credit unions, and brokerage accounts. Knowledge is power and it can be used to protect savings and investments if the rules are known. Here is a brief review:
The Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Association (NCUA) are independent agencies which are backed by the full faith and credit of the United States government. Their purpose is to protect depositors’ funds placed in banks and savings associations (FDIC) and credit unions (NCUA). The standard FDIC and NCUA insurance amounts are the same – $250,000 per depositor (called members at credit unions), per insured bank or credit union, based on ownership category.
The FDIC insurance limit applies to each account holder at each bank. Here is how the FDIC defines coverage for different account holders by some common “ownership” types:
Deposit accounts (e.g., checking, savings, CDs) owned by one person. FDIC insurance covers up to $250,000 per owner for all single accounts at each bank.
Deposit accounts owned by two or more people are known as “joint” accounts. FDIC insurance covers up to $250,000 per owner for all joint accounts at each bank.
Accounts such as IRAs and self-directed defined contribution plans fall in this category. All such accounts owned by the same person at the same bank are aggregated towards the $250,000 FDIC coverage limit for these types of accounts.
Remember that insurance under NCUA has similar classifications and limits but not all credit unions carry NCUA insurance. Notification will be placed prominently on websites and places of business. FDIC coverage should also be similarly evident. If not, ask!
What do you do if you currently have more than $250,000 in an “ownership category” at your favorite financial institution? If you want those deposits to be fully insured, spread them among unrelated banks, savings institutions, or credit unions that carry FDIC or NCUA insurance. Read more about saving in my blog, Saving for Short-term Goals.
The Securities Investor Protection Corporation (SIPC) protects you in case your brokerage firm fails. If this scenario happens, SIPC protects the securities and cash in your brokerage account up to $500,000. You should know that the $500,000 protection includes protection up to $250,000 for cash in your account to buy securities.
SIPC protection isn’t available by default and steps in only if your brokerage firm fails. Furthermore, it’s not automatic, that is, you must file a claim to receive protection from SIPC. SIPC’s ability to satisfy your claim is limited by law.
Your investments will be protected by SIPC if:
SIPC does NOT protect:
“SIPC protects the customers of over 3,500 securities brokerage firms. Most U.S. brokerage firms are required to be SIPC members.” If SIPC coverage is not prominently displayed, ask!
Some brokerage firms also insure assets over the SIPC coverage limits. Again, especially if you have substantial invested wealth, it is important to ask.
You can call me an optimist, but history tells us that time will heal these most recent financial wounds. Perhaps legislators will rethink banking regulations that were relaxed for smaller banks not long ago. To be sure, both bank management and their respective Boards of Directors will demand in depth reviews of both the loans and the investment portfolios of their financial institutions to ensure proper safeguards are set for any likely potential depositor demands.
The stock market focus will likely move on to other pressing news and interest rates may be raised further by the Federal Reserve before eventually coming down. The timing of any of this is up in the air. That is one of the reasons that I believe it is imperative to give your investments “time in the market” and not try to “time the market.” A long-term approach is the most likely to reap positive reward. (See also Market Anxieties and Fears.)
One of my life mantras is that knowledge replaces fear. Knowledge also allows us the opportunity to make changes if needed. You can be safe and save under full insurance coverage if you take advantage of the rules and limits for banks, savings institutions, and credit unions. Likewise, the rules for coverage of brokerage account assets set the stage for wise decisions.
How do you feel about the safety of your investment and banking assets? Have you made any changes in where you save because of the collapse of Silicon Valley Bank? What other financial fears keep you up at night?