Yes, the Bank Chaos Is Scary. But Don’t Let Fear Make Your Money Decisions.

If you’re been watching the unspooling trouble in the banking system with unease, wondering if your money is safe, know this: You aren’t alone.

Since the tumult unleashed by the failure of Silicon Valley Bank, Jason Miller, partner of Crewe Advisors in Salt Lake City, says he’s fielded calls from a number of clients with money in regional banks, some of whom have transferred deposits away from the smaller institutions into money-market funds or into globally important large banks considered “too big to fail,” like JPMorgan Chase, Citigroup, and Bank of America.

Miller has urged his clients not to panic. For starters, their money in the bank is safe, as long as they stay within the amount insured by the Federal Deposit Insurance Corporation (FDIC). Secondly, panicking depositors risk a self-fulfilling prophecy. “If people think there is a concern, they could create a concern,” Miller said.

That’s in part what drove the collapse of SVB. Fears about the bank’s solvency circulated quickly via messaging apps among its customers, many of whom were venture capitalists and startup founders. When those customers decided to withdraw their money en masse, they forced a liquidity squeeze at the bank, which had lost significant amounts of money in Treasury bonds due to rising interest rates. 

Most of the depositors at the bank were uninsured, meaning that they held more at SVB than the FDIC limit of $250,000 per person, per bank. Federal regulators ultimately announced that they would make depositors whole for their entire balance, not just the insured amount.

But it’s best not to count on that happening again, experts say. Instead, stay within the FDIC limits of $250,000 per depositor, per insured bank, for each ownership category. For example, a couple could each have $250,000 in protection at a bank for their individual accounts, and another $250,000 each in a joint account in both of their names. They could have additional protection if they held a revocable trust at the same bank, up to $250,000 per owner per unique beneficiary. 

Depositors don’t have to pay for FDIC insurance, which covers checking accounts, savings accounts, money market deposit accounts, certificates of deposit and cashier’s checks, money orders and other official items issued by the bank. 

FDIC insurance doesn’t cover bond or stock investments, including money-market funds. These funds, which invest in very short-dated bonds, are widely considered a cash equivalent, although their principal is not guaranteed. They are insured by the Securities Investor Protection Corporation (SIPC) for losses due to brokerage failure, not any decline in the value of securities.

Market losses may well continue, as experts predict a rocky road ahead. If that happens, it might feel good to pull your money from stocks and spread it among FDIC-insured banks and money-market funds. But “don’t automatically follow the herd,” said Stanley Teitelbaum, clinical psychologist, financial therapist and author of Smart Money: A Psychologist’s Guide to Overcoming Self-Defeating Patterns in Stock Market Investing. 

The banking crisis comes as trust in institutions, whether government or media, is at an all-time low, Teitelbaum said. Worried investors might not be reassured by official remarks on the safety of the financial system. 

But the facts don’t lie, Teitelbaum said: Since 1926, the Standard & Poor’s has returned annualized gains of about 10%, despite its many ups and downs, and investors won’t benefit from these gains if they run to cash.

What’s more, bank failures have occurred with some regularity in recent years, without bringing the entire economy down with them.

Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com