Author’s Note: First Republic bank failed over the weekend and the vast majority of its assets have been assumed by JP Morgan Chase. All customer deposits, whether FDIC insured or not, will be protected. Like many other banks, the value of the bonds First Republic held as reserves as well as the value of loans made to customers declined in the face of rising interest rates.
When interest rates rise, loans or bonds with a fixed interest rate, fall in value. First Republic’s liabilities simply exceeded their assets, at least without the benefit of expensive credit facilities. First Republic’s business model of offering incredible service to wealthy clients with large cash deposits faltered in the face of a rush to safety as their customers sought the security of FDIC insurance in the wake of the Silicon Valley Bank and Signature Bank failures in March. Compounding its woes, bank customers everywhere have sought higher yields on deposits. Customer service, it turned out, was not reason enough for its depositors to pass on either an FDIC guarantee or a competitive yield.
First Republic had assured its customers all was well over this entire period. Banks, unless you specifically use one of their fiduciary services, which do not include checking and saving deposit relationships, are not fiduciaries. They are not obligated to do what is in your best interests as a depositor.
First Republic’s demise may mark the end of banking woes in America and the three recent bank failures may be the extent of the current banking troubles. However, there may also be danger lurking in commercial real estate loans that many regional banks hold. Whether now, in the face of this uncertainty, or at any time, arranging your banking relationships such that all of your deposits enjoy full FDIC protection (whether exceeding the $250,000 FDIC insurance cap or not) is a good move. The following guide will walk you through how to arrange your bank accounts so that bank solvency is not your concern.
With the health of the banking industry in the news recently, many people are naturally concerned about protecting their deposits in the best way possible.
While holding excessive cash for long periods of time can limit your overall returns and erode the success of your long-term finances, it may be prudent to do so depending on your financial plan and goals. If you’re holding more than $250,000 in cash, you should consult with your financial advisor and at a minimum ensure you’re smart about maximizing FDIC protection and not having to worry about bank failures. Here are some concrete steps you can take:
What is the FDIC?
The Federal Deposit Insurance Corporation (FDIC) insures all deposit accounts at insured banks and savings associations, including checking, savings, money market deposit accounts, and certificates of deposit (CDs). These accounts are insured up to the FDIC’s limit of $250,000 per depositor, per insured bank, for each account ownership category (such as Individual, Joint, Trust, etc.). While there has been discussion among lawmakers about increasing the FDIC (Federal Deposit Insurance Corporation) insurance limits, at this time there is no legislation pending.
This means bank customers who have multiple accounts can have more than $250,000 in insurance coverage – as long as a customer’s funds are deposited in different ownership categories and certain conditions for each category are met.
Maximizing Your FDIC Protection
There are several ways to increase your FDIC insurance protection by leveraging these ownership categories. Here are some advantageous options to consider.
Open Joint Accounts
If you have maxed out your single account coverage, you can open a joint account with another person. To qualify as a joint account, all account holders must have identical withdrawal rights. Obviously, this limits who you might establish a joint account with.
For example, assuming your spouse is someone you trust, you could each have individual bank accounts with $250,000 and a joint bank account with $500,000. Together, you would be insured for $1,000,000 in FDIC insurance coverage. Why? Because individual and joint accounts are in different ownership categories, meaning each person has $250,000 in FDIC coverage in each ownership category.
Establish Trusts with Beneficiaries
This can be a formal living (revocable) trust or an informal trust such as a ‘payment on death’ account. This account receives $250,000 in FDIC insurance for up to five beneficiaries, for a maximum total FDIC coverage of $1,250,000.
It’s important to note that, currently, if beneficiaries have unequal shares, the insurance coverage may be less than the full amount. Beginning in April of 2024, new laws will go into effect that will resolve some questions regarding unequal shares.
Open Accounts at Various Banks
Each depositor is insured per bank, per ownership category. If you use two banks, you have doubled your potential FDIC coverage. Moving money between bank accounts is virtually seamless if you are comfortable with online banking.
Use CDARS (Certificate of Deposit Account Registry Service)
CDARS is a service that lets a depositor spread their deposits across multiple banks while still working with just one bank. This can be a convenient way to simplify banking while maximizing the benefits of FDIC coverage.
Use ICS (Insured Cash Sweep)
An Insured Cash Sweep (ICS) account is a program offered by FDIC-insured banks that lets depositors secure large deposits while still maintaining access to their funds. Deposits that exceed FDIC insurance coverage are swept into one or more FDIC-insured banks to insure the entirety of a depositor’s balance.
Participating banks can be located at IntraFi. If your bank does not participate in Intrafi, you can link your account to Max My Interest which provides the same service at a very reasonable 0.02% per quarter. Be sure to consult with your advisor to make sure you are utilizing the proper strategy for your financial goals.
It’s okay to still be a little unsure about which road to travel. Fortunately, the FDIC has an online calculator where you can describe your situation and get a solid determination of your FDIC coverage limits.
Finally, one other potential avenue to be mindful of: short-term U.S. treasuries are also a low risk way to store your cash. A safe (but not the most convenient) method would be via Treasury Direct. More likely (and more conveniently), consult your financial advisor about direct investments in treasuries or in investment vehicles holding U.S. treasuries (for example a U.S. Treasury Money Market Fund). Funds like these can be held in brokerage accounts; the government provides insurance on brokerage account funds (known as SIPC coverage) on up to $500,000 of securities or $250,000 of cash.
Abacus Can Help
You don’t have to be an expert in FDIC insurance to see there are many different ways to protect yourself. That said, it can bring tremendous peace of mind when you work with a financial advisor to ensure you are covered in case of an unexpected banking emergency.
Abacus loves to help people not only protect themselves, but to explore their values in the process. Schedule a 15-minute introductory call today and find out how we might be able to help you.