Understanding Deposit Insurance in the Wake of the Silicon Valley Bank Collapse

On March 10th, 2023, Silicon Valley Bank failed after a run on its deposits and had to be taken into receivership by the FDIC. Despite its status as the 16th largest bank in the United States, the SVB collapse is now regarded as the second largest bank failure in US history, after Washington Mutual in 2008. Although the FDIC has stated that depositors will be fully protected and have access to their money, both insured and uninsured, it is a reminder to all of us that financial literacy is an essential aspect of protecting your money and investments.  

On the heels of the recent failure of Silicon Valley bank, it’s prudent to learn how much protection your bank and investment account balances carry. Thanks to agencies like the Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), and the Securities Investor Protection Corporation (SIPC), your assets likely have some protection already in place. These agencies offer financial compensation if your eligible financial institution provider fails. They are fully funded by financial institutions that participate as members and pay premiums. There are limits to how, when, and how much money SIPC, FDIC, or NCUA insurance reimburses. It is also helpful to know the differences between these types of protections and how they complement one another.

The first of these agencies to be established was the FDIC, founded in 1933 in response to bank failures during the Great Depression. It was originally created to promote public confidence in the banking system. Today, the FDIC and NCUA insurance protect your deposits up to $250,000, while the SIPC protects up to $500,000. The idea is that by assuring depositors their money is safe, the government can prevent the kind of panic-driven race for withdrawals that can otherwise sink even healthy financial institutions. As a matter of fact, in the case of the FDIC, since its creation, not one cent of insured deposits has been lost. 

The first thing to know about FDIC insurance is that nearly all banks, but not all, are insured by the FDIC. Credit unions offer protection as well, through the National Credit Union Administration (NCUA). This is a parallel agency that offers equivalent deposit insurance to the FDIC limit. From a consumer’s perspective, you will not find any differences between the two agencies. Because of the similarities, we will focus our discussion on the FDIC, the more popular of the two. FDIC insurance covers a range of bank products, including checking accounts, savings accounts, money market deposit accounts, and certificates of deposit. The FDIC insures up to $250,000 per depositor, per institution, and per ownership category. Ownership categories include singly held accounts, joint accounts, different types of trust accounts, corporate, and government accounts, and some retirement accounts. There is separate coverage for money that is in different categories of ownership. Therefore, a single person can receive coverage well above $250,000 at one institution.  

For example, if you have a savings account in your own name with a balance of $250,000, and a joint account you share with your partner with a balance of $500,000, your household will be covered up to $750,000. This is because the FDIC regards joint accounts as being in a different “ownership category” from single accounts and insures them up to $250,000 per depositor. For example, what if your balances exceed the coverage amount after the sale of a house or if you inherit a large sum of money? In that case, you would want to spread the risk by spreading your cash between different bank institutions. 

In the unlikely event a bank fails, the FDIC steps in to protect bank customers’ funds by identifying another financial institution that can take on the failed bank’s assets. If they cannot find another bank with the ability to take on these new accounts, they will pay funds to the affected customers up to the insurance limit and assume control of the assets and debts of the bank. If you want to determine how much of your cash is protected by the FDIC, there is a handy calculator on the FDIC’s website. A similar tool, the share estimator tool, is also available on the My Credit Union website. These websites also allow you to determine if your banking institution is a member of the FDIC or NCUA. It is important to note that these two agencies cover what we tend to think of as everyday bank accounts, they do not cover stocks, bonds, or mutual funds like those in your investment accounts. 

Assets in your investment account are protected by a different entity. The Securities Investor Protection Corporation (SIPC) is an independent organization for brokerage firms like Charles Schwab and Fidelity. It was created as part of the Securities Investor Protection Act of 1970.  Created to shield investors from brokerage firms becoming insolvent, SIPC generally covers stocks, bonds, mutual funds, and other securities. The SIPC homepage offers a full list of covered securities. This agency provides up to $500,000 of protection for investment accounts held in each separate capacity (e.g., joint or sole owner,) with a limit of $250,000 for claims on uninvested cash balances. Therefore, there are circumstances in which investors could be covered for more than $500,000. For example, if you hold an individual brokerage account, an IRA, and a Roth IRA at the same brokerage firm, each of these account types would have up to $500,000 of coverage. Larger brokerage firms like Charles Schwab and Fidelity also have additional insurance in place. Therefore, before you consider spreading your invested assets between different financial institutions reach out to your financial advisor for details on insurance coverage at your custodian. 

If a broker fails, it usually transfers all customer assets to another institution. However, if a broker fails and assets are missing the SIPC gets involved. SIPC protection is not the same as the protection of your cash at a FIDC-insured bank because SIPC does not protect the value of any security. Instead, the SIPC uses their own funds up to $500,000 per account, with a limit of $250,00 in cash, to buy the same number of shares you originally owned and replace your cash.  It is important to note, SIPC insurance does not cover investment losses or worthless stocks, losses from bad advice, investments in commodity futures, currency (foreign exchange trades,) annuities, hedge funds, or investments not registered with the SEC (US Securities and Exchange Commission.)

It is important to do some due diligence on where you put your hard-earned money and to understand how these insurance coverages work. Agencies like these were created to bolster consumer confidence and encourage stability in the financial system. The advice given by President Roosevelt in 1933 after the creation of the FDIC in response to the Great Depression still stands true, “ I can assure you, my friends, that it is safer to keep your money in a reopened bank than it is to keep it under the mattress.” Now, here we are, 90 years later having to remind ourselves of this again as we read the headlines of financial institutions failing. If you want to learn more about how to protect your assets reach out to the team at Morris Financial Concepts.