Banks have been front and center since the collapse of Silicon Valley Bank back in March and the collateral damage that occurred for other banks and their stock prices. Silicon Valley Bank experienced a run on deposits by customers concerned about the safety of their cash. This also caused panic for companies that needed their funds to make payroll for their employees. Regulators shut down the bank and fully ensured all customer deposits.
First Republic Bank has been facing similar issues, and within the first three months of the year, saw net customer withdrawals totaling more than $70 billion. This number could have been much worse if not for $30 billion in deposits from some of the country’s largest banks just to keep the bank afloat. However, this could not solve all of the bank’s problems, and that led to authorities stepping in and auctioning the bank to J.P. Morgan Chase.
What does this turmoil mean for investors? First and foremost, you want to make sure that your deposits at your bank are covered through FDIC insurance. The limit for FDIC insurance is $250,000, and that could mean for bank customers that you want to spread your funds to multiple different banks. In the case of Silicon Valley Bank, the Federal Reserve stepped in and insured all deposits, but that might not be the case for some regional banks. Another way to avoid being over the $250k FDIC insurance limit is to invest your money in short-term US Treasury Bills that are backed by the U.S Treasury. Short-term treasury rates are offering very favorable yields currently and can also protect those assets from the threat of the bank collapsing. You can purchase these directly through the Federal Reserve website or at an investment brokerage firm.
Another option for cash that you may not need in the short term is to invest those funds in a brokerage account. When money is invested within securities in a brokerage account, those funds are protected by the Securities Investor Protection Corporation. The SIPC will ensure up to $500,000 of the securities purchased within those accounts. For these funds, it will make sense to invest them in conservative liquid investments. You will also want to link your brokerage account directly to your checking account in case you ever need to make a withdrawal.
What this will most likely lead to is even tighter restrictions on banks and stricter lending policies. We are not out of the woods yet with this situation, and the long-term effect could be a drop in the number of regional banks that we have to offer.
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