March 14, 2023
Customers of Silicon Valley Bank aren’t going to lose any of their deposits. Neither will the businesses or individuals who have money at Signature Bank.
That resolution, however, doesn’t make the upheaval of the past several days any less scary. As stocks of banks like First Republic and even brokerage industry stalwarts like Charles Schwab shudder, it’s natural to want to know what kind of backstops exist to keep you from losing money if your financial institution fails.
The news here is mostly good, since entities like the Federal Deposit Insurance Corp. and the Securities Investor Protection Corp. offer hundreds of thousands of dollars of guarantees.
Here are some answers to questions you may have about checking accounts and about money at investment firms. We’ll also suggest a few steps you might take even if the tumult subsides. Shoring up defenses — and having a few backup plans — is just good financial hygiene.
How much deposit insurance exists for my bank account?
You generally get $250,000 of insurance per depositor, per bank. The insurance covers several categories of holdings, including checking and savings accounts, prepaid debit cards and certificates of deposit. (In the Silicon Valley Bank and Signature Bank instances, regulators chose to make depositors entirely whole — with no cap — though there is no guarantee that they would do it again the next time a bank failed.)
If you have many different types of holdings, then you add up the balances to see if they exceed $250,000. If not, then, say, your $50,000 CD and your $25,000 savings account are both protected.
The insurance costs nothing, and you don’t have to check a box when you open your account to get it. It’s automatic as long as you’re banking with an FDIC-insured institution. The FDIC’s website has a searchable database.
What if I want more than $250,000 in coverage?
If you set up a joint account with someone else — say, a spouse — you each get $250,000 in coverage, for a potential total of $500,000 in a single joint account.
Another possibility is to open accounts at different institutions. You get the same FDIC coverage at each, with no limits on the number of institutions where you can have accounts (and insurance).
How does FDIC insurance work if my bank goes out of business?
If you have enough insurance to cover your balances, you usually have access to that money within days, often the next business day. Sometimes your money will end up at a new bank right away if that bank takes over your old one. So-called bridge banks are operating the former Silicon Valley Bank and Signature Bank for now.
If you don’t have enough insurance to cover your balances, you may still get some or most of that uncovered amount back. But it could take years for the FDIC to sort it out as it winds down a failed bank’s operations and sells its assets.
What would happen to the direct deposit of my paycheck or Social Security payment if my bank failed?
According to the FDIC, if another financial institution acquires the failed bank right away, the deposits should land in your new account without incident. Bridge banks should have the same abilities.
How would I get access to my safe deposit box if my bank failed?
Access to safe deposit boxes should be possible the next business day after a bank failure, the FDIC says on its webpage with frequently asked questions about bank failures.
How much deposit insurance exists for my credit union?
The National Credit Union Administration administers an insurance fund that is similar to the FDIC’s and has its own $250,000 limit. You can read more about it on the mycreditunion.gov website.
How are my brokerage and investment accounts protected?
If a brokerage firm is in financial trouble, an entity called the Securities Investor Protection Corp., known as SIPC, serves as a backstop. It’s a nonprofit corporation that was created under the Securities Investor Protection Act of 1970.
SIPC generally covers up to $500,000 of securities and cash (including a $250,000 limit for the cash component) for each customer, though that can be higher for people with multiple accounts — depending on the account types and whether they’re individual accounts or jointly held.
A traditional individual retirement account, a Roth IRA and an individual brokerage account, for example, would each qualify for a $500,000 limit at the same firm. The same goes for a separate joint account or a trust account.
But if you had two individual brokerage accounts at the same firm, for instance, you would receive only up to $500,000 in protection for both. A married couple with a joint brokerage account — as well as two individual brokerage accounts at the same firm — would receive an additional $500,000 in coverage for the joint account.
Do all brokerage customers receive protection?
SIPC says on its website that it is important to understand that its coverage “is not the securities world equivalent of the Federal Deposit Insurance Corporation.” Its focus is on “restoring customer cash and securities left in the hands of bankrupt or otherwise financially troubled brokerage firms.”
The protection is available only if the brokerage firm fails and is a member of SIPC; most brokerage firms are required to be members. You can check if your brokerage firm is one of its 3,500 members on SIPC’s website or by contacting the firm.
After a brokerage firm has failed, SIPC quickly seeks to transfer the accounts to a healthy firm so customers can get immediate access to their investments. If account transfers aren’t possible, or money is still missing, customers can file claims with SIPC for what they are owed, said Josephine Wang, president of SIPC.
What types of investments are covered?
In addition to cash, covered investments include stocks, bonds, mutual funds, and other company shares and registered securities.
SIPC does not cover unregistered investment contracts, unregistered limited partnerships, fixed annuity contracts, currency, and interest in gold, silver or other commodity futures contracts or commodity options, according to SIPC.
Why were investors worried about Schwab?
Shares of Charles Schwab, the giant retail brokerage, plunged on fears that it, too, could be swept up in the crisis. The stock fell as much as 23% on Monday before closing down more than 11%. Investors may have been worried about its large banking business, which, like Silicon Valley Bank, holds a considerable amount of fixed-income investments that have dropped in value because of rising interest rates.
But Schwab has healthy reserves, and analysts aren’t worried about its financial position. And as the firm’s top executives recently pointed out, more than 80% of its clients’ cash is insured dollar for dollar by the FDIC.
Should I have backup credit cards?
There is no indication that any major credit-card issuer is in trouble, but it’s always wise to have two cards — with different companies — if you can qualify for that much credit.
You might lose your primary card, for instance. Or the card company could shut the card down if it’s worried about fraud — say, when you’re traveling.
Could I lose access to ATM withdrawals?
If a bank fails, there could be technical snafus if a new institution inherits insured accounts. That might render an ATM card inoperable for a few days.
Another possibility is a widespread power outage that lasts for days and makes it hard to get cash (and use credit or debit cards in stores). During the run-up to severe weather, bank customers may empty ATMs. And in the aftermath, it may be hard for the money trucks to get to the ATMs to refill them.
Given these possibilities, it’s a good idea to tuck a few hundred dollars away if you can afford to set that money aside. Just remember where you put it. It’s easy to forget — and then, years later, give away the clothes or books with the money still hidden inside.
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