The recent events surrounding the failure of Silicon Valley Bank and Signature Bank, combined with the volatility in stock prices of other financial institutions, serve as stark reminders that the U.S. and global financial system is complex and ever-changing. These periods can be unnerving for investor psychology and can leave some wondering, “Are my investments and cash safe?”
As it relates to cash deposits, the U.S. banking system is fortunately one of the most robust and secure in the world. Following the fallout of the Global Financial Crisis more stringent regulations increased the capital necessary for banks to hold to help protect depositors. As of December 31, 2022, global systemically important banks (G-SIBs) held nearly 2.5 times the amount of capital than they did in 2008.1 These assets are the first line of defense against bank risk.
Additionally, in the U.S., bank deposits are required to be insured by the Federal Deposit Insurance Corporation (FDIC). This means that cash deposits are insured up to $250,000 per depositor, per account registration, per financial institution in the event of a bank failure. Balances above the $250,000 FDIC limit are uninsured and therefore could be at risk.
Other Investable Assets
In contrast, investments such as mutual funds (including money market funds), ETFs and individual securities are not covered by FDIC insurance and banking regulations. However, if you hold these assets through the trust department of a bank or at an independent trust company like Trust Point, the law requires that these assets be custodied and held separately from the general assets of the bank or trust company so they will never be commingled. In short, your money is your money, regardless of potential concerns at the institution managing them. In the rare event that the institution overseeing the assets would fail, the assets would still be yours but be transferred to the care of an acquiring organization by whoever is overseeing it – OCC if federal charter or state Division of Banking if state charter.
While we remain confident in our financial system, we do suggest being vigilant and to employ good governance. Here are a few practical steps individuals and institutions alike can take:
- Cash Balances – Cash balances at banks held below the $250,000 level are explicitly insured by the federal government. Balances above that level are based on the banking institution’s ability to pay those balances which, as we have seen with Silicon Valley Bank recently, can be an issue when a large number of depositors wants out at the same time. It is therefore prudent where possible to limit cash balances to the $250,000 threshold. If impractical, one way to mitigate this risk is to spread cash across multiple banks, maintaining balances of $250,000 or less at each institution.
- Movement of Money – With the fast-paced nature of money and bank accounts opening and closing, there exists the opportunity for “bad actors” to take advantage of the confusion and regulatory changes. When processing money movements, we recommend particular attention and caution be paid with regard to wire/bank routing instructions that may come via phishing emails, text messages or other intercepted communications.
It can be easy to take for granted the complex architecture of the U.S. and global financial system. Whether in calm or volatile periods, investors and depositors must take the time to understand where their assets are held and what protections are available to them.
As always, please reach out to your relationship manager with any questions.
- Goldman Sachs as of December 31, 2022