With the banking crisis of 2023, the benefits of staying under the FDIC deposit limit became increasingly urgent. The 2023 banking crisis, of course, was started when a California bank named Silicon Valley Bank collapsed. That triggered a wave of uncertainty in financial markets, and ultimately a government bail-out of depositors at Silicon Valley Bank who were over the FDIC deposit limit.
The Silicon Valley Bank Collapse
Why Did Silicon Valley Bank Collapse, Causing the Banking Crisis of 2023?
Silicon Valley Bank (SVB) collapsed for a variety of reasons, but one has been viewed as prominent. SVB’s management apparently failed to hedge their long-term investments against losses, as most other banks do. Their risk management officer had left the bank the previous year, and news reports stated that they never bothered to hire a new one. Often it is the risk management officer who might make sure a bank hedges against losses, but Silicon Valley Bank was so poorly managed that apparently nobody was watching.
By hedging against losses, a bank can use sophisticated investment management tools as a kind of insurance against losses on longer term investments. Such hedging should be typical at well-run banks, but evidently not at Silicon Valley Bank.
Then, when depositors learned of Silicon Valley Bank’s massive losses on their long-term investments (over a billion dollars), that triggered a “run” on the bank around March 8-9, 2023. So many depositors pulled their money out of SVB that the bank no longer could meet its obligations. So, the state and federal government regulators shut down the bank, and took it over.
The FDIC limit and Silicon Valley Bank
Unfortunately, fewer than 5% of Silicon Valley Bank’s depositors were under the FDIC limit. The reason is that they had catered mostly to companies and wealthy tech boom executives who (kudos to them) had good-sized accounts. Their savings were therefore at risk since they were over the FDIC limit. Also, the companies were at risk because they would not be able to meet their payroll obligations.
The FDIC and government stepped in and immediately said that depositors under the FDIC limit would have full access to their deposits. If you were over the FDIC limit, you could have delays, or maybe not get all your money back. This is what happened in previous bank failures, like Lehman Brothers. However, as fears of more banks collapsing spread, the government agreed to give all depositors access to their deposits. However, there remains no guarantee this will happen in other bank collapses.
FDIC Limit Explained
The FDIC (Federal Deposit Insurance Corporation) is an independent U.S. government agency that provides deposit insurance to protect depositors in the event of a bank failure. The FDIC was created in 1933 in response to the banking crisis of the Great Depression, and it continues to help maintain stability and public confidence in the U.S. financial system.
The FDIC insures deposits up to a certain amount per depositor, per insured bank. As of 2023, the standard insurance amount is $250,000 per depositor, per insured bank. This means that if a bank fails, the FDIC will reimburse depositors up to the insured amount. The FDIC also works to prevent bank failures by overseeing banks for safety and soundness, and by providing resources and support to troubled banks to help them recover.
It’s important to note that the FDIC limit applies to each depositor at an insured bank, not each account. So if you have multiple accounts at the same bank, such as a checking account, savings account, and CD, the total balance of all your accounts would be considered for insurance purposes. So, if the total of all your accounts is above the FDIC limit, you only are insured up to the limit.
If you have any questions, you should check with your bank as to whether your accounts are under the FDIC limit. In addition the FDIC limit can change, and you can ask your bank or financial advisor what the current FDIC limit is.
Benefits of Staying Under The FDIC Limit
While the FDIC limit is supposed to protect depositors in the event of a bank failure, there are also benefits to staying under the FDIC limit even when your bank is financially stable.
Protection Against Bank Failure
The most obvious benefit of staying under the FDIC limit is protection of your accounts against bank failures. If a bank fails and you have deposits that are within the FDIC limit, you are guaranteed by the FDIC to receive your insured funds back. This means you won’t lose any money even if your bank goes out of business. By staying under the FDIC limit, you can ensure that your deposits are fully protected and minimize your risk of financial loss.
Peace of Mind
Knowing that your deposits are fully insured can give you peace of mind. You can rest assured that you won’t lose it in the event of a bank failure. This can help you feel more confident in your financial future and make it easier to plan for long-term goals, such as retirement or buying a home.
Easy Access to Funds
When you stay under the FDIC limit, you can easily access your funds when you need them. You don’t have to worry about waiting for the FDIC to reimburse you if your bank fails, as your insured funds are guaranteed to be returned to you in a timely manner. This can be especially important in emergencies or unexpected situations, where you may need access to your funds quickly.
Flexibility in Choosing Banks
By staying under the FDIC limit, you can choose from a wider range of banks to deposit your funds in. You don’t have to limit yourself to only the largest or most established banks, as you can feel confident that your deposits are protected regardless of the size of the bank. This can give you more options and flexibility in choosing a bank that best meets your needs, such as one with higher interest rates or better customer service.
Disadvantages of the FDIC Limit
NOTE: YOU NEVER SHOULD EXCEED THE FDIC LIMIT. NOTHING IN THIS ARTICLE SHOULD BE CONSIDERED FINANCIAL ADVICE AND YOU SHOULD CONSULT A LICENSED FINANCIAL ADVISOR IF YOU HAVE ANY QUESTIONS.
While there are many benefits to staying under the FDIC limit, there are also some potential disadvantages of it. Generally these disadvantages only affect mid- to large size companies or wealthier individuals.
Multiple accounts to manage: Some companies or high net worth individuals may need open multiple accounts at different banks in order to stay under the FDIC limit at each bank. This can be difficult to manage and keep track of, and can make accounting more difficult.
Potentially Lower Interest Rates: Some banks may offer higher interest rates for jumbo deposits that exceed the FDIC limit. If you stay under the limit, you may miss out on these higher interest rates. However, it’s important to weigh the potential earnings against the risks of losing money if the bank were to fail.
In conclusion, staying under the FDIC limit can provide many benefits, from protection against bank failures to increased savings opportunities. By keeping your deposits within the FDIC limit, you can ensure that your money is safer, giving you peace of mind and flexibility in managing your finances.
NOTHING IN THIS ARTICLE SHOULD BE CONSIDERED FINANCIAL ADVICE AND YOU SHOULD CONSULT A LICENSED FINANCIAL ADVISOR IF YOU HAVE ANY QUESTIONS. All in all we believe staying under the deposit limit is the best practice.