FDIC Q&A

I’m so fortunate to have a client base who rarely calls me with worries generated by the various “crisis news networks.”  Last year, I had more reporters contact me about market declines than I had clients call me.  

With this weekend’s (March 11, 2023) news about bank failures, I’ve received more than a few questions.  Since I’m confident more of you have similar questions, I thought I’d share some Q&A.  

FDIC Takeovers Q&A

Q: Briefly and simply, what has happened?

A: Over the last five days, the FDIC took over Silvergate Bank, Silicon Valley Bank, and Signature Bank. Essentially, these banks were subject to a classic bank run where the banking clients had deposited amounts way above the FDIC limits, these depositors got hints that the bank was at risk of getting shut down, and they withdrew billions leaving the bank without necessary reserves.  The FDIC quickly took over all three banks with their promise to cover all FDIC-insured deposits.  With concerns that this scare will cause a wider-scale panic, the FDIC promised to protect all deposits (of any size) at Silicon Valley and Signature Bank. 

Bank stock prices fell 10-25% over these last five days, with the most impacted banks dropping much more.  Despite the news, major panic has not set in, the stock market has been surprisingly stable (dropping “only” 2.5% over the five days) and interest rates declined (increasing fixed-income investments by 1.4%).

Q: Is my money at my bank safe?

A: Yes (probably).  Money in your bank’s checking or savings accounts are FDIC insured up to their limits (typically, $250,000 or $500,000 per account).  If you have deposits over the covered limitations, your money is (and always has been) at risk.  

Q: Is my money at TD Ameritrade safe?

A: Yes, your assets at TD Ameritrade are safe from a similar bank run.  Remember, TD Ameritrade is not a bank but a custodian holding your assets.  I like to think of custodians as a safety deposit box that holds your assets; your (and my) “box’s” contents are separated from the institution.  Of course, the value of the contents in the box will go up and down in price. 

Your money market assets at TD Ameritrade are also safe.  Money market assets must be invested in short-term, secure holdings that protect owners from potential losses.  These funds are FDIC protected and I keep the balances within the insured limitations.  

Q: Are these three bank failures a sign of bigger issues?

A: I don’t think this is a widespread problem for banks.  These three banks had unique issues.  Specifically, they worked primarily with a specific clientele (venture capital firms and crypto investors) who had huge sums of uninsured assets.  Additionally, these banks did a terrible job matching their liquidity needs with their investments (if someone can ask for their cash in the next five minutes, long-term investments are not a good idea.)  I do not see these same issues across the banking industry.

However, banks have a reported $1 trillion in uninsured bank deposits that may move to receive better protections.  This money movement will put more banks at risk and likely result in additional FDIC takeovers.  I’m guessing we’ll continue to see skittish markets for several weeks.

Q: Is there a silver lining here?

A: I do not see any long-term economic damage here (except for the stockholders of failed banks).  I do think there is a good possibility these events will lead to two positives: (1) the Federal Reserve may stop trying to slow down the markets with continued interest rate hikes, and (2) the debt ceiling battle may pass without too much drama.  Minimizing these two concerns may lead to more stable markets going forward.