Is Your Cash Safe In The Bank? Experts Offer Advice Amid Concerns Of Systemic Market Risk

Topline

The monumental failure of Silicon Valley Bank and Signature Bank earlier this month have raised concerns of system-wide contagion that could spread to other regional and local banks, and though experts say Americans’ money in those banks is safe, they also suggest people should diversify their assets and cash to help mitigate the risk.

Following the collapse of SVB and Signature Bank, and as other banks see their stocks fall, analysts … [+] assure Americans their money in the bank is most likely safe.

Anadolu Agency via Getty Images

Key Facts

Americans with less than $250,000 in the bank are guaranteed their money is safe by the Federal Deposit Insurance Corporation (FDIC), which also announced it would make SVB customers whole, even if they had more than $250,000 in the bank.

For customers with more than $250,000 in a bank, Haydar Haba, managing partner of venture capital firm Andra Capital, advises diversifying money into two or three other banks or to put some of that money in federal bonds, which earn interest.

Matthew Goldberg, an analyst at Bankrate, called the collapse of SVB and Signature Bank a “wake-up call” for Americans to make sure their money is at an FDIC-insured bank, saying: “Even during times when there are no bank failures or few bank failures, you always have to make sure your money is safe and within FDIC limits and rules.”

Preferably, Haba said to choose a bank with a “Prime-1” rating from Moody’s Analytics, which considers a bank to be Prime-1 if it “reflects a superior ability to repay short-term obligations.”

Crucial Quote

“There is a feeling of a contagion going on and the only thing the Fed can do in that case is what they did with SVB and Signature Bank, which is making customers whole,” Haba said. “The key is diversification. You can’t put all your eggs in one basket. It doesn’t make sense.”

Key Background

Santa Clara, California-based Silicon Valley Bank’s abrupt collapse earlier this month sparked fears banks had not been prepared for the effects of rising inflation and the Federal Reserve’s interest rate hikes designed to curb inflation. The bank’s collapse has been linked to multiple rounds of interest rate hikes over the past year, which caused customers’ assets to lose value, prompting depositors at SVB, which catered to large tech companies like Circle, Roblox and Roku, to withdraw their money in a swift bank run. Even though the FDIC announced last week it would make all SVB customers whole regardless of how much they had deposited in the bank, the bank’s failure alarmed Americans their money might not be safe in other regional banks if those banks are jeopardized in a phenomenon called contagion, in which the turmoil of one bank spreads to others. The same day the FDIC announced it would make SVB customers whole, New York’s state regulatory body took over Signature Bank, after a similar bank run and a sharp drop in its stock (the FDIC announced Sunday banking giant Bancorp had taken over Signature Bank and assumed its deposits).

Contra

Shares of multiple regional banks fell over the past week, including San Francisco-based First Republic Bank, which sank by 36% Thursday morning. Its shares later rebounded following the announcement of a $30 billion rescue plan through uninsured deposits from 11 of the country’s biggest banks. Some investors, however, criticized the move, including billionaire Bill Ackman, who warned the rescue plan creates a “false sense of confidence.” Other economists, including Blackrock CEO Larry Fink, caution the collapse of SVB could be just the “first domino to drop” before a “cascade throughout the U.S. regional banking sector.”

What We Don’t Know

Whether a bill proposed in the wake of SVB’s collapse by Democratic lawmakers to enhance regulations on small and medium banks will pass the Republican-controlled House. The bill, introduced by Sen. Elizabeth Warren (D-Mass.) and Rep. Katie Porter (D-Calif.) would reintroduce provisions of the Dodd-Frank Act that had been limited in 2018, including stress tests and enhanced risk-management practices. It faces opposition from a group of Senate Democrats who said they had no regrets about supporting the 2018 deregulations, as well as congressional Republicans, including Sen. Tim Scott (R-S.C.), who argued the bill would not prevent banks from relying on the federal government to cover “excessive risks.”

Tangent

Swiss banking giant Credit Suisse’s stock plummeted by more than 60% Monday morning, hitting a record low of 91 cents, one day after its rival UBS announced plans to buy all of its shares in a $3.2 billion rescue plan. Shares of Credit Suisse, which had been mired by controversies over charges of money laundering, tax evasion and links to collapsed hedge fund Archegos and financial services firm Greensill Capital, fell after the bank admitted last week to “material weaknesses in its financial reporting, becoming the latest bank to be affected by recent turmoil in the banking system.