Brock Williamson, CFP®
Banking Problems and Opportunities
Considering recent events, it seems appropriate to reiterate my advice on the topic of banking, cash management and having an adequate emergency fund. My job is to educate and help you protect and grow your money for a lasting, enjoyable retirement. Protection is key to this plan and currently the topic is at center stage. My objective is not to scare anyone, but to speak truthfully and give you options for your own financial preparedness in case your bank ever fails now or in the future.
What has happened: At the end of last week, SVB (Silicon Valley Bank), a mid-sized regional bank, was taken over by the FDIC (Federal Deposit Insurance Corporation). This bank backed many tech startups and, unfortunately, as those companies started hurting, and as interest rates increased, along with some bad debt management from SVB, a massive run on the bank occurred. The stock price collapsed and then halted trading Friday. FDIC then stepped in and took over the bank.
I have watched and studied many runs on banks during my financial career. The Savings and Loan crisis in the 80’s had the same causes of the banking problems today with massive inflation and rising interest rates. This hit Texas hard as it was at the center of the 80’s banking crisis. Then in 2008, I witnessed major Wall Street banks on the verge of failure due to unscrupulous lending and securitization of bad real estate. The government stepped in with more bailouts. However, Washington Mutual, Lehman Brothers and Bear Stearns all went under. I had one client with an account and note at Lehman Brothers and it was a very bad deal for him as he received pennies on his dollars.
This year two major Cryptocurrency platforms and now SVB have also gone down. The question regarding SVB is will this bleed over to a contagion event? Meaning, will it spread to other regional banks?
There are a lot of ripple effects from this banking situation. Does this trigger a recession? What about larger businesses that had deposits at SVB? How do they make payroll? All of this will unfold shortly. I have always counseled clients, “Control what you can control”. You, nor I, can control SVB or the global economy. However, we can control our personal finances. That includes what institutions we bank with and how much money we keep in deposits.
Monday morning update on SVB. The government will backstop all deposits of Silicon Valley Bank. This won't help SIVB stock much, but will help stem banking contagion and calm a very nervous stock market. Per Interactive Brokers, NASDAQ should provide info on SIVB shares today.
Meantime, parts of the markets are selling off this morning with the SPDR S&P Regional Bank Index (KRE) off 17% today. We're still waiting on news of SIVB stock trading this morning, and on the continued talks over the remaining assets of the company. ZION bank stock here in Utah is down 25% today and over 60% in the last year.
My Advice: Any money that you have in any one specific banking institution above $250,000 move immediately. Yes, move it now! FDIC only covers up to $250,000 per depositor, per institution. if you keep more than $250,000 in cash at a single bank, then you run the risk of losing some of those funds if your bank fails.
I have always advised to keep an emergency fund in the bank. For most couples that is $25,000-$100,000 for current cash flow needs and to have 6 months to 1 year of an emergency fund in the bank.
Keeping more than enough for an adequate cash management and emergency fund in the bank is problematic for two reasons. First, you are making very little money in interest from the bank. Second, fractional reserve banking allows the bank to only keep a small amount of your deposits in the vault, while the bank then lends the rest of your money to other businesses, real estate projects and loans for much higher interest rates than what they pay you the depositor. When a run on the bank occurs, they don’t have enough money at the bank to give your deposits back.
Opportunities for short term safe funds outside a bank
Option 1. 3-month T-Bills.
The financial textbook definition of the risk-free investment is the 3-month Government Treasury Bill. Payments are 100% guaranteed by the United States Government. To this point, the modern US has never defaulted on debt. Please see the below link as current rates are around 4.5%-4.87%. https://ycharts.com/indicators/3_month_t_bill Investing in 3-month T-bills is easy. We purchase them in your investment account. They are 100% fully liquid and if you every need the money we can sell and then send you the cash back to your bank. 4.5% is a much higher interest rate than what banks are paying and owning 3-month Treasuries is more safe then your bank account.
Option 2. 1yr, 2yr or 3yr MYGA’s.
MYGA’s stand for multi-year guaranteed annuities. These are issued by insurance companies for a stated term and a stated guaranteed interest rate. Most MYGA’s rates today are in the 4.5-6% annualized range. The money needs to be held to the term of the contract (1yr, 2yr, 3yr, or 5y). After the term, you can take the money penalty free.
Option 3. For $1,000,000 or more CD’s.
For our large clients that want FDIC insurance across all their safe money assets, we can build CD ladders. We purchase short term CD’s from multiple banks to keep clients under the FDIC limits at each institution. CD rates are currently in the 4-5.5% range.
If you have any questions or if you would like to discuss protecting your cash and safely making more money than what the banks are currently paying, please schedule a 15-minute call using this link https://calendly.com/promontoryfp or call our office and schedule an appointment. Thank you for your continued trust.