The FDIC’s and Federal Reserve’s decision to cover fully deposits at both Silicon Valley Bank (SVB) Bank and Signature Bank leaves some uncertainty about whether banks’ deposits are fully insured above $250,000 per depositor per class of deposit. President Biden did not clarify the issue when he spoke this morning to allay depositors’ concerns, even though he explicitly promised that deposits are protected.

There is an issue of moral hazard here. FDIC insurance limits are well established. Should depositors who ignore these well-established limits, and keep deposits above those limits to curry favor with senior bank executives and get certain privileges – as was the case with SVB - get their own rules?

But, still more important than the moral hazard issue here at the moment, is what happens when and if there is another 5 or 10 or 100 bank failures. With SVB Bank and Signature Bank, the FDIC invoked the banks as “systemically important” in order to provide the unlimited depositor protection that it is providing.

Can depositors assume that every bank going forward is going to be systemically important and that they’ll be made whole? Is there a number of banks that is hit when the “systemically important” designation can no longer work or a size of a bank? And, then what is the rule for credit unions and the NCUA?

Since this can only be changed by an act of Congress, and until such act occurs, we continue to recommend that depositors stay within applicable FDIC and NCUA limits.

A great primer on FDIC insurance can be found here.

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The sudden bank run on Silicon Valley Bank (SVB) that materialized over the course of yesterday is quite troubling. The reality is that banks make bets on interest rates, and when interest rates move suddenly in one direction, as they have over the last year, it creates challenges for a bank’s Risk Department. In the case of SVB, they are reported to have very low yielding long term assets, such as 10-year or 30-year Treasuries, that they may have purchased when interest rates were sub-1%. These assets would presumably trade at such a significant discount if they were to sell them today that the bank would not be able to cover its liabilities.

SVB’s situation is both unique and extreme since most of the bank’s depositors are huge venture capital funds and entrepreneurs from Silicon Valley. These are depositors who are so wealthy that the FDIC insurance amounts of $250,000 for an individual ($500,000 for a couple) are entirely inconsequential. Because the depositors are so over-exposed to a failure, a sudden bank run, especially in Silicon Valley where information can also move and be acted on much more quickly than normal.

It is fair to say that ordinarily when banks have unrealized losses, they have the time and ability to borrow from the Fed’s discount facility.

While we therefore would not expect that other banks will have runs like this, there is just one simple thing that depositors can do with their cash to protect themselves, and it is the same advice that I have given since BestCashCow’s founding in 2005.

The advice is to stay within FDIC and NCUA limits at real banks and credit unions. Your money should not only be FDIC-insured or NCUA-insured, but it should be someplace where you have direct access to it, where your name is on the account, and where it is completely transparent what you are in. Taking this advice one step further, I would reiterate my advice to avoid fintechs, even those claiming that they are holding your cash in a government-insured account, and money market accounts. The institutions behind these instruments could easily expose them to either (a) other institutions like SVB, and or (b) be engaged in activities that may involve risk and may not be completely transparent in order to offer deposit rates that are competitive with those that banks are offering.

In short, the safest thing for your money today is quite simply deposit accounts at FDIC or NCUA-insured banks.

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The Consumer Financial Protection Bureau (CFPB) is a regulatory agency of the United States government that is responsible for consumer protection in the financial sector. The CFPB was established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in response to the 2008 financial crisis, which highlighted the need for stronger consumer financial protections. The CFPB's mission is to make markets for consumer financial products and services work for Americans, whether they are applying for a mortgage, choosing among credit cards, or opening a savings account or a CD. The agency enforces federal consumer financial laws and regulations, educates consumers about financial products and services, and monitors the financial marketplace for abusive and fraudulent practices.