Strategies for safeguarding wealth from bank failure.
You may have noticed in the headlines recently that Silicon Valley Bank has been closed by regulators and taken over by FDIC. Silicon Valley Bank was one of the largest banks in the US, which brings up the question: How do large investors and institutions deal with the issue of keeping their money safe on deposit without having to worry about FDIC limits when a bank fails?
The Federal Deposit Insurance Corporation – FDIC for short — provides deposit insurance to protect depositors in case of bank failures. However, the FDIC limits the amount of coverage to $250,000 per depositor per insured bank for each account ownership category. This means that if a depositor has more than $250,000 on deposit in a single bank, they are not fully insured.
There are several options available for large investors to keep their safe money on deposit without worrying about the FDIC limits. Here are a few options:
- Open accounts at multiple banks. One way to increase your FDIC coverage is to open several bank accounts, which will cover $250,000 at each bank. This strategy can be time-consuming and may require additional paperwork and account management.
- Use FDIC insured sweep accounts. Many brokerage firms offer FDIC-insured sweep accounts that automatically move excess cash from a brokerage account into an FDIC – insured deposit account. These accounts can provide almost an unlimited amount of FDIC coverage for cash as the funds are spread across multiple banks.
- Use CD’s. Certificates of deposit (CDs) are a type of deposit account that typically offer higher rates than traditional savings accounts. Many banks offer CDs with FDIC insurance coverage of up to $250,000 per depositor, per insured bank, for each account ownership category. Large investors can use a CD ladder strategy to increase FDIC insurance coverage. A CD ladder involves investing in multiple CDs with different maturity dates, different banks, allowing investors to maintain access to their funds while also increasing FDIC insurance coverage. Many brokerage firms have access to CDs from dozens of banks around the country.
- Consider alternative investments for your cash. Large investors may also consider investments like money market funds, short-term bond funds, or municipal bond funds. While these investments are not FDIC insured, they ay provide higher returns than traditional savings accounts or CD’s; however, it’s important to carefully consider the risks associated with these investments and work with a financial advisor to ensure they align with your risk tolerance and financial goals.
In conclusion, large investors have several options for keeping their safe money on deposit without worry about the FDIC limits. By using the strategies listed above and working with a knowledgeable financial advisor, investors can mitigate the risks associated with bank failures. It’s important to consider the benefits and risks of each strategy and to work closely with your advisor to develop a plan that works for you.
Salvatore Pitti, CFP®, CRPS™, AIF® is president of The Pitti Group Wealth Management.