Dear Dr. Per Cap:
Why did that bank in California fail? And if it happens at my bank, will I lose all the money in my account?
Dear Banking On
Unfortunately, the biggest U.S. bank failure since 2008 occurred earlier this year when Silicon Valley Bank tanked to the tune of over $150 billion in uninsured deposits. We’re still waiting for the dust to settle but it appears Silicon Valley Bank expanded too quickly, maintained poor oversight of its financial risks, and made a bad bet on interest rates falling instead of rising.
The good news is that the turmoil didn’t spread, which is always a risk when a bank fails because it can create a domino effect of other bank runs in which customers panic and scramble to withdraw their money before more banks shut down.
More good news is that bank regulators stepped in fairly quickly to take control of Silicon Valley Bank with the promise that all uninsured depositors will get their money back. Hopefully that will be sooner rather than later. But the key words are “uninsured depositors”.
There’s a back-up plan in case of bank failures. It’s called the Federal Deposit Insurance Corporation (FDIC) and it insures bank deposit accounts for balances up to $250,000 per depositor, per FDIC insured bank. Banks actually pay a few cents for every dollar deposited as premiums to the FDIC which is why you should always see an FDIC member sticker on the door when entering a bank or an FDIC member statement on its website.
On its own website the FDIC states that historically it pays insurance within a few days of a bank’s closing by either 1) providing each depositor with a new account at another insured bank in an amount equal to the insured balance of their account at the failed bank, or 2) issuing a check to each depositor for the insured balance of their account at the failed bank.
So for your average person who doesn’t have a checking or savings balance that exceeds a quarter million dollars there’s no need to worry. However, not every bank customer keeps all of their money in deposit accounts. Many banks also offer investments like stocks, bonds, and mutual funds as well as life insurance policies and annuities. These investment and insurance products don’t carry FDIC coverage so if you hold any of these non-deposit accounts at a bank, pay close attention to the risk.
The Silicon Valley Bank failure was really ugly because there were a lot of large deposit accounts that exceeded the FDIC limits. Many of these uninsured account holders were tech firms; however, there were some uninsured individual depositors too who had a very rude awakening when people started withdrawing their money from Silicon Valley Bank in droves.
Financial crises like these are tough to watch and important reminders that anytime you place your money and trust in an institution there is an element of risk. Be smart and don’t take it for granted.