Keep Your Money Safe: Tips for Protecting Your Investments during Bank Runs and Market Instability

March 17, 2023

Since the Silicon Valley Bank (SVB) and Signature Bank blowup and the ripple effects that followed, there have been many discussions about how to keep your money safe, including cash (checking and savings deposits, CDs, and other money-market instruments) and other investments. While most of the information out there from reputable sources is good, we wanted to send out a quick note to our users clarifying some of the key action items.

Below is a 3-part plan for how to invest your cash generally and how to deal with any continued instability in the banking sector:

TLDR: take any cash in bank accounts above deposit insurance (typically, $250K for the US institutions) and spread it across multiple institutions or park it in safe, short-term securities (not because there is impending doom, but because it is the prudent thing to do). Brokerage and retirement accounts are largely fine but use reputable institutions and don’t hold excess unallocated cash.

#1 Pick your banks and brokerages wisely

First, the good news. While it has been a scary week in markets, it is worth remembering that Federal Deposit Insurance Corporation (FDIC)  insures almost all operating banks in the US up to $250K per person (this can be expanded; more on this later). Similarly, if you keep your money with a credit union, there is analogous insurance of up to $250K provided by the National Credit Union Administration (NCUA). In Canada, the Canadian Deposit Insurance Corporation (CDIC) insures up to $100K CAD per person per type of account (more on this in section 2.) Meaning that even if a bank or credit union fails, you retain any cash up to the insured amount in its entirety.

Now for some important caveats. First, if a bank goes into receivership, it might take a few days to be able to access even these insured deposits. We saw this in the SVB case, where over the weekend after the collapse, many companies and individuals could not access any of their funds (even those under guarantee). The FDIC usually works quickly (next business day), but there is still some range of possible resolution timelines. Second, for any cash amounts above your insured limits, your money is at risk. There is a very large range of outcomes in terms of recovery amounts and timeframes for uninsured deposits – savers should be aware that they may not be made whole if a blowup occurs and that the proceedings can take years rather than days.

Not all banks are alike. Many considerations come with choosing a bank, but it is always worth considering whether your bank or banks are the best suited to meet your needs. In addition to deposit insurance, you may favor systemically important banks. Large banks are less likely to be let fail (whether you think this should be the case or not, Janet Yellen reiterated this on Thursday) and undergo more rigorous regulation and evaluation (like stress tests). You should also evaluate deposit yields (more on that in section 3), the breadth of services and their corresponding fees, account minimums, ease of access, and any other intangibles.

In terms of brokerages, there is a similar insurance program governed by the Securities Investor Protection Corporation (SIPC) for US institutions, which covers up to $500K total, of which $250K can be cash (this coverage is only in effect when a brokerage fails, not when the value of your holdings changes according to market fluctuation). This limit is generally per bank per person. It can be expanded if you have different types of accounts (e.g., an individual brokerage account, a traditional retirement account, and a Roth IRA would net you $500K coverage per account, while two traditional retirement accounts at the same firm would only give you $500K cumulatively). 

Note: The SIPC does not cover less-common securities like warrants and commodity futures. In Canada, a similar program called the Canadian Investor Protection Fund (CIPF) covers between $1M and $3M CAD depending on account segmentation.

For brokerages, there are some pluses and minuses here relative to banks. Unlike a bank deposit which is essentially an unsecured loan to a bank, holding a security (like an equity, which could be a stock, ETF, or mutual fund, for example) gives you an ownership claim of an asset. So, although many such securities are inherently risky in terms of their variations in value, your claim on that value is more direct should a failure occur.  While a “run on the bank” as we saw with SVB, could, in theory, happen to any bank, there isn’t as much of a concept of a run on a brokerage because all assets held by the brokerage are specifically assigned to a person, and there would be nobody left holding the bag if everyone lined up to divest their securities (short of some sort of widespread fraud). However, the claims process is more complex and can take months. As an aside, you may not need a brokerage for some investments – for instance, one can buy US Treasury securities from the source via TreasuryDirect.

One wrinkle comes in the form of “cash sweep” accounts. In the case of SVB, some customers maintained balances through Silicon Valley Bank that was invested on their behalf at partner institutions. There is some ambiguity about how ownership is handled in cases such as these, so people with similar setups should ask their institutions what level of claim they have on these indirect holdings and what would happen in case of a crisis.

A final note – active investors can and do monitor the health of the financial institutions they bank and invest with. High credit spreads and rapidly declining equity prices (for those institutions with publicly traded stock) are warning signs of risk. Accounting statements are helpful, too – but many assets held on bank balance sheets don’t get “marked to market” regularly or are otherwise hard to value, and information is disseminated with a lag. Furthermore, bank runs and collapses can happen extremely quickly, as we saw in the case of SVB – often too quickly to realize what is going on and to pull out your money. So better to be set up safely than rely on anticipation of, or quick reaction to, an unfolding event.

Action items:

  • If you use a less-common bank, check its membership status with the FDIC here, or if you use a credit union, check your insurance status here, or if you are in Canada, check your bank’s CDIC status here. You can check your brokerage’s SIPC status here in the US or the CIPF status here
  • Decide on the best bank(s) and brokerage(s) for you (we’ll talk about how to allocate cash across these institutions in the following two sections)
  • If you hold less-common cash instruments or securities, check if they are insured
  • Ask your institution how ownership works in the case of a failure if you are part of programs like cash sweeps

#2 Expand your deposit insurance

There are easy ways to expand your insurance allotments if you hold more than the limit (for instance, over $250K at an FDIC-insured US bank).

The first and most obvious way is to open additional bank accounts because each account at a different bank has a separate guarantee. For instance, if you hold $1M in cash evenly spread across four member FDIC banks, you are insured up to $1M and will be made whole even if all four banks fail. There is a further side benefit towards liquidity – if any bank goes into receivership, you can still use a different one for daily cash needs until the FDIC insurance kicks in (though this should only be a matter of days.)

You can also expand the insured amount by adding additional people to the account for FDIC insurance. Most commonly, this would mean adding a second person to the account (such as a spouse) and thereby doubling the FDIC amount at that bank to $500K, but it may also be adding payable-on-death (POD) recipients to the account.

In Canada, you can spread your cash across different institutions, like the US, to expand your coverage. Furthermore, the insurance is $100K per account type, which means that even at the same bank, you would receive separate $100K for your traditional account and a TFSA, for example. The CDIC provides a helpful guide to the eight distinct account categories, all of which are automatically insured up to the $100K limit.

Action items:

  • Never hold more than your insured amount in cash at a bank – particularly a regional bank. If you wish to hold more than that amount in cash, spread it across multiple banks, or invest it in safe, short-term securities.
  • Consider expanding your FDIC-insured amount at any one bank by, for example, converting accounts to joint accounts in the US or moving money to different types of accounts in CA, if that is right for you.

#3 Only hold what you need in cash, and choose the institutions and vehicles wisely

Savvy investors not only consider how much they want to invest in a diversified mix of longer-term assets (platforms like PortfolioPilot can help) but also how to best structure their cash portfolio to balance liquidity, risk, and yield.

A primary consideration here is to ensure you have enough liquidity to cover daily cash needs and emergencies under various scenarios. The most liquid options are checking and savings deposits – and this remains true so long as the amounts are within FDIC-insured guarantees, where investors can be sure to have access to cash in several days, worst case. Even within this bucket, you can shop around for a better yield than you might currently be getting, as yields range from nearly 0% to 4%, which is a very large dispersion (just keep in mind the totality of bank-selection criteria from section one). You usually don’t want to leave excess cash in your brokerage uninvested because yields are often lower than in a well-chosen bank account. In the worst-case scenario of a SIPC process, you might lose access to it for an uncomfortable period of time.

From there, any excess cash can be put to work prudently. In general, the longer-dated the security and the less liquid, the better the return will be*. So, if you want to hold $50K in cash but only anticipate needing to withdraw $10K over the next three months, you could hold the remaining $40K in securities like CDs. You can also move cash to your brokerage and invest in funds that hold cash instruments like Treasuries (the current 3-month yield is over 4.5%) and agency bonds. Just be aware that some “money market” funds invest in commercial paper, which are short-term loans to companies that can become impaired given poor economic circumstances but can sometimes offer meaningfully higher returns.

Lastly, it might make sense to have a fallback source of funds, like a credit card, to use in case of short-term cash emergencies, though if you do everything else right, this should be seen as a precaution.

Action items:

  • Map out short-term liquidity needs and consider how to meet them under a variety of circumstances
  • Find a good yield on your cash, balancing those liquidity needs and risks
  • Have a fallback source of funds, like a credit card, on hand

* When the yield curve is inverted, it may not look like this is the case. For instance, if the 1-year rate is 4% and the 2-year rate is 3%, it may feel like you are getting a better deal investing for a shorter period of time. But in a year, you will need to reinvest your 1-year proceeds at the prevailing 1-year rate, which will, in expectation, be below 2%, thus earning you under 3% on average.

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