How worried should I be about the security of my bank accounts?
Based on recent events in California, you don’t need to worry, as long as the government is willing to expand FDIC insurance coverage on demand. Concerns over the collapse of Silicon Valley Bank (SVB) and Signature Bank have lessened in recent days. Other US banks including regionals appear to be capitalized sufficiently. And the Federal Reserve is ready to step in as needed. Bank runs are to be avoided at all costs. Moral hazard issues are on the back burner.
So, what happened? SVB was a major lender to tech startups and venture capital firms, which have been hit the hardest during the market downturn. Venture capital began drying up, forcing startups to draw down their funds. At the same time, the bank’s extensive investments in long-term bonds lost value as interest rates rose rapidly. SVB disclosed bond sales at a loss and tried to raise more capital. Customers were rattled. More than 90% of SVB's deposits exceeded the $250,000 FDIC insurance limit. The bank’s customers tended to be in the tech industry, so many knew each other well. They sent urgent warnings via group texts and tweets. Digital access provided easy and immediate ability to withdraw from their accounts. Banks typically keep enough cash on hand to meet regular withdrawals, but as so many withdrew simultaneously, there wasn’t enough. There was a run on the bank and the bank failed. Signature Bank had a similar business model and faced a similar crisis of confidence.
To avoid contagion the Federal Reserve stepped in. It guaranteed all deposits at the two failed banks. It also plans to make loans as needed so the bank doesn’t have to sell certain bond holdings at a significant loss.
You can do several things to ensure your accounts are safe. First, make sure the institution is insured by the FDIC. FDIC covers up to $250,000 per individual. In addition, owners of a joint account are each covered up to another $250,000. To protect even larger balances, you could talk with your bank, as they may have arrangements with other FDIC-insured institutions. If you have individual accounts, consider adding beneficiaries to avoid the need for that account to go through probate.