March 2023 marked a historic month for U.S. banking. Two major banks, the Silicon Valley Bank and Signature Bank, closed within a couple days of each other, marking the second and third largest bank failures in U.S. history. (The top spot belongs to the 2008 Lehman Brothers collapse.)
The markets responded erratically to these collapses, and are still very up and down. During this time, the Fed also increased interest rates another 0.25% to help curb inflation. The interest rate increases, while necessary to tamp down inflation, puts added pressure on the banking system.
So, what does all of that mean for your money, and the economy? Here’s what you should know:
What Caused These Bank Failures?
So far, only two banks have collapsed this year: Silicon Valley Bank in California, and Signature Bank in New York.
Silicon Valley Bank (SVB) bought up long-term bonds when the interest rates were very low. However, as interest rates went back up, the bank lost money on those bonds. A few days before its collapse, SVB announced its plan to raise $2 billion in capital to offset bond losses. That announcement spooked its wealthy clientele, who quickly began pulling their money from the bank.
SVB is different from many other banks, because its depositors include wealthy individuals and businesses. So if even a small percentage of their customers pulled all of their money, it really adds up. The losses were too significant for SVB to secure.
Typically, the FDIC insures a bank balance of up to $250,000. But in this case, the repercussions from so many wealthy depositors losing their money was too dangerous. So the FDIC guaranteed both insured and uninsured deposits, because not doing so presented a threat to the U.S. economy.
This fear spread to Signature Bank, which also served a wealthier clientele. After the SVB collapse, Signature Bank depositors withdrew billions of dollars, causing the FDIC to step in again and guarantee those deposits. The following week, Signature Bank was taken over by Flagstar Bank, who agreed to take over the deposits, loans and 40 branches of Signature Bank.
What Do These Bank Collapses Mean For You?
After these two major bank failures, it’s hard to say whether more are coming. It might sound scary, but this is an opportunity for everyone to familiarize themselves with FDIC insurance and the importance of diversification.
The FDIC insures up to $250,000 per depositor, per insured bank, for each account ownership category. Accounts with less than that amount should be protected in the event of a bank failure.
If you have more than $250,000 in any account (or $500,000 in a joint account,) it’s very important to diversify where your money is stored. But even if you have less than that, you might want to consider using different banks to keep your money safe. One useful tool is MaxMyInterest, which can help you determine which banks will earn you the most money per account. As you add in different banks, it allows you to keep track of what you can earn at each bank, and whether you might need to allocate some funds.
Just like with your portfolio, banking diversification helps to keep your money safe if something goes awry at one of your banks, and lets you maximize the benefits of each of those institutions.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes you too should have access to financial resources and fee-only financial planning. For more information on the services offered, contact Katie today.