When Silicon Valley Bank (SVB) experienced a bank run and was abruptly closed and taken over by the Federal Deposit and Insurance Corporation (FDIC), a whole lot of money was at risk.
Apparently, about 96% of the cash deposited at the bank was uninsured. That is to say that the vast majority of accounts held much more than the $250,000 that the FDIC guarantees will not be at risk in the event of a bank failure.
This made for an exceptionally anxious weekend for many Silicon Valley startup companies, founders, and other account holders. Fortunately for them, and for many other banks who might have experienced similar problems if actions weren’t taken, regulators chose to make depositors at SVB (and Signature Bank which also failed) whole by guaranteeing all deposits would be honored.
There was no guarantee this would happen, and if it hadn’t, billions of dollars that had been deposited at the bank could have been lost and only partially recovered. As it stands, tens of billions in bank debt and equity (as owned by shareholders and debtors) is now gone.
What have we learned from the biggest banking crisis since the Great Recession?
For some, the takehome lesson is that there’s little need to worry about deposited money. The government will step in and make us whole.
While that happened in this case, and it may very well happen again, I wouldn’t count on FDIC insurance being infinite. What if 10 banks had failed? Or 100?
Some see it as a vote for decentralization and a cryptocurrency use case. The value of Bitcoin and others did surge when it was understood that depositors wouldn’t lose their money.
For me, the takehome lessons were that bank runs can happen more swiftly than ever thanks to social media, banks can still fail in relatively good economic times, and that I’d best make sure my cash savings is not at significant risk.
Admittedly, I’ve shifted to holding much of our cash in a Vanguard money market accounts (VUSXX). It’s not entirely without risk and it’s not FDIC insured, but the risks are quite low in a fund investing primarily in short-term U.S. treasuries with 30-60 day maturity. Up to $250,000 in cash is insured by the SIPC when held at a brokerage.
For our other cash, we use a high-yield joint savings account paired with a checking account. This account is FDIC-insured, but looking back, I can see that we were above the FDIC insured limits for most of the last couple of years as we sold properties and saved to start building a new home.
If our bank had failed and the Feds hadn’t gone above and beyond to guarantee deposits beyond what was FDIC insured (as they did with SVB and Signature Bank), we would have lost some of the cash we had set aside for our home build. It’s a risk I didn’t think much about at the time, but in hindsight, I wish I had been more conscientous.
How to Increase Your FDIC Insured Cash Holdings
One way to be assured that your cash is properly insured is to keep no more than $250,000 in cash. Most Americans won’t have any issue here, but if you’re building up “dry powder” for future investments or purchases, or if you’re a company that must carry larger sums of cash on hand, risk mitigation is imperative.
One “solution” that won’t work is to simply open additional accounts at the same bank. You don’t get $250,000 of insurance per account, whether it’s checking, savings, or some combination thereof. It’s essentially per person, per bank, although there is some nuance to that, as you’ll learn below.
Open Accounts at Multiple Banks
Spread your money around. It’s a bit of a hassle, but if you’re going to keep more than $250,000 in cash, you can open accounts at different accounts and the first $250,000 at each one will be FDIC insured.
Need to keep a million dollars in cash? Keep $250,000 at each of four banks.
Married? Open a Joint Account
Accounts owned by individuals are only insured for $250,000, but joint accounts get double the protection, so you’re safe with up to $500,000 in a jointly owned account.
$1 Million Insured With Two Individual Accounts and One Joint Account
Need to keep a million dollars in cash? As a couple, you can do this safely at one bank. Each individual can have an account insured for up to $250,000 apiece, and the couple can jointly own a third account at the same bank with $500,000 of FDIC insurance. Add those up, and you get a cool million.
Open a Cash Management Account
A cash management account is a substitute for a traditional savings account, and it acts in a similar manner. You can deposit money, withdraw money, perhaps use ATMs and debit cards, and generally do what you would with checking and savings accounts, sometimes by pairing with a traditional checking and/or savings account.
They tend to pay relatively high interest rates. Rather than being offered by banks, they are often offered by financial technology (FinTech) companies that partner with multiple banks.
The benefit of this arrangement is that they can spread your money around at multiple banks, multiplying your $250,000 of FDIC insurance by the number of banks at which your money is deposited. The experience is seamless from the user perspective, but behind the scenes, your dollars may be deposited at more than one banking institution.
Two popular Cash Management Accounts are offered by Betterment and Empower (formerly Personal Capital).
An Empower Personal Cash Account offers 4.10% interest as of 3/19/2023, is insured for up to $1 Million for individual accounts and $2 Million for joint accouns, takes direct deposit, and requires no minimum balance. It can be paired with a traditional checking account for bill pay, and you can make unlimited transfers.
The primary drawback of an Empower Personal Cash Account is a limit of $100,000 in daily withdrawals. It’s not often that a six-figure daily spending limit is an issue, but if you were wanting to purchase a home or invest multiple six figures in one investment, you’ll have to plan ahead and withdraw the money over several days. See here for all the details on an Empower Personal Cash Account.
A Betterment Cash Reserve account also offers $2 Million in FDIC insurance for joint accounts, unlimited withdrawals, and a similar interest rate of 4.00% in March of 2023.
There’s also no minimum balance, and you’re not limited as to how much you can withdraw in a day. You can learn more about the Betterment Cash Reserve cash management account here.
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Bank with an IntraFI Institution
In a similar manner to cash management accounts, select banks that are affiliated with the IntraFI network have the ability to spread your deposits around to other participating banks, increasing the amount of cash insured by the FDIC substantially.
To what extent may depend upon the bank, and there are hundreds of them all across the nation. The IntraFI website mentions “multi-million dollar FDIC insurance” can be had when they place your money in direct deposit accounts, money market deposit accounts, and CDs at multiple institutions.
The interest rate will vary widely based on the bank you choose, but you may be able to find a local bank that participates. A quick review of the list for my state revealed two IntraFI banks with branches where we live in northern Michigan.
I wouldn’t expect to get the 4% or higher interest rates that Betterment, Empower, and other cash management accounts are currently offering, but you may be able to accomplish your goals of safety at a local bank. 4% interest on a million dollars is $40,000 per year, so if you are going to carry a large cash balance, be sure to consider the importance of earning interest on your idle cash while considering the value of convenience.
If Your Balance is Under $250,000
When the best interest rate you could get was well under one percent, it didn’t matter all that much where you stored your cash. But now that interest rates have been on the rise, even $25,000 to $50,000 in savings, a reasonable emergency fund for many, can earn you $1,000 to $2,000 in interest per year.
As of this publication, CIT Bank is offering 4.40% interest on their Platinum Savings account as long as you carry a minimum balance of $5,000. Wherever you do your banking, make sure you’re getting something back for parking your cash. Savings accounts with interest rates of 0.10% are no longer a viable option when inflation is 6%.
Have you had a need to keep more than $250,000 in cash on hand? Did you find a solution that kept your money safe?