what experts say about the safety of your money
Despite the financial crisis of 2008, bank failures are extremely rare.
However, the unexpected closures of Silicon Valley Bank and Signature Bank have many consumers worried about their deposits, their bank and the US banking system.
“Every American should have confidence that their deposits will be there if and when they need them,” President Joe Biden said Monday in an address aimed at calming fears about the Federal Deposit Insurance fund’s move corp and the US Treasury to disperse quickly to prevent broader contagion.
Still, recent events raise old questions about how safe your cash is at the bank. Here, experts answer what a bank run is, how FDIC insurance works, and whether your deposits are still safe.
What is a bank run?
As banks take customers’ deposits and invest those funds, this cash is not readily available.
“If everyone wants to withdraw money at the same time, the bank doesn’t have the reserves to do it and they basically go upside down,” said Tomas Philipson, a professor of public policy studies at the University of Chicago and former acting chair of the White House Advisory Council.
In a moment of panic, customers would literally run to the bank, Philipson explained. This is now done electronically. And because electronic transactions are processed at high speeds, bank runs are faster than ever – in the case of SVB, it was A dizzying 48 hours.
While SVB also had an unusually high percentage of uninsured deposits, there are other mid-sized banks that could be at risk of large withdrawals.
Can this also happen with other banks?
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The short answer is “possibly,” according to Stacy Francis, a board-certified financial planner and president and CEO of Francis Financial in New York. She is also a member of CNBC Financial Advisory Board.
“This is happening in part because of the Federal Reserve’s sharp hike in interest rates,” Francis said.
Banks hold long-term bonds that are currently paying low interest rates, she said. When the interest rates banks charge on these longer-term loans are lower than the interest rate they offer depositors on their savings accounts, less money comes in than they pay out.
In addition, “many banks are seeing large withdrawals from cash depositors who are looking [for higher rates] to make more money,” Francis added. “All of this creates stress.”
What about the cash at my bank?
It doesn’t look like a financial crisis yet.
Senior Financial Planner at The Planning Center
“You may not have access for a short period of time, but the government has very quick procedures to get you back using your cash in a short amount of time,” said McClanahan, who is also a member of the CNBC Financial Advisor Council.
However, if you have more than $250,000 in deposits at a bank, you should contact a private banker at your institution or split it into accounts at different banks, she advised.
“Another alternative is to transfer some to a brokerage account and use mutual funds invested in government-backed securities,” she added. Some Treasury bills or T-Bills are now paying 5% after a string of Fed rate hikes.
How is this different from 2008?
“This does not appear to be a financial crisis yet,” said Jude Boudreaux, CFP and senior financial planner at the New Orleans Planning Center. Boudreaux is also a member of CNBC Advisory Board.
“The two banks we’re talking about now specialize in riskier assets,” he noted, specifically crypto and tech startups. “The likelihood of this becoming a national wave of bank issuance seems slim.”
In 2008, irresponsible lending fueled a widespread housing bubble, and when borrowers defaulted on their mortgages, the country’s largest banks were left with trillions of dollars in near-worthless investments.
These institutions are now in a stronger position due to new regulations introduced in the wake of the financial crisis, including higher capital requirements and annual stress tests.
Last year, all major banks passed.
https://www.cnbc.com/2023/03/14/us-banking-concerns-what-experts-are-saying-about-your-moneys-safety.html what experts say about the safety of your money