With the recent collapse of Silicon Valley Bank and Signature Bank, millions of previously content Americans are suddenly wondering what their savings should do should their bank fail.
Failures are inevitability within the banking industry and can take various forms, from individual financial institutions or thrift closures to episodes where multiple institutions collapse simultaneously, which impact all areas of financial institutions more broadly.
Failures may not be as common today, as they were during the Great Depression‘s early days, but they can still occur due to various causes – from deposit runs and changing economic conditions to run-on deposits or changes in regulation.
In the recent recession, fewer banks closed than usual, likely as a result of stricter regulations put into effect after the financial crisis. Even so, it remains important to remain aware that failures can still occur despite these regulatory efforts.
Financial institutions that fail to meet regulatory requirements may be taken over by their regulating agency and paid back deposits at a higher rate than what’s offered through FDIC insurance, in order to protect depositors and prevent a bank run that would harm the economy.
The government takes these measures in order to safeguard depositors as well as prevent bank runs that would disrupt commerce and damage its economic standing.
As a result of Silicon Valley Bank’s collapse and First Republic’s seizure (https://www.npr.org/2023/05/01/1173175098/svb-now-first-republic-how-it-all-started) federal officials are exploring ways to ensure these sorts of problems don’t recur in future.
Investigations will focus on what allowed for their collapses, how depositors can be protected with policies implemented against collapse, and what can be done to aid financial institutions going forward.
Traditional financial institution accounts are protected by FDIC insurance, so your funds should remain safe even if your bank goes under.
But it’s still wise to know what to do should it happen, so here are a few key strategies for dealing with bank closure.
The Current State of the Economy (US)
Economy refers to the system that produces goods and services for human consumption. Its success hinges on strong labor markets and profitable production. If an economy becomes weak enough, a recession may occur.
These factors are prompting consumers to spend less, which in turn affects all sectors of the economy – retail sales included. The United States of America is home to vast wealth, so keeping it secure is of the utmost importance.
Therefore, the government has implemented various regulations and rules that all must abide by in order to keep these funds safe.
The United States also enacts laws to govern how banks are managed so as to prevent being compromised for illegal purposes and used as platforms for hacking attacks. Many are worried about the state of our economy and whether or not it will collapse, raising many important questions and leading to differing viewpoints on this matter.
Reminding oneself that this situation is extremely urgent is important and government action must be taken immediately in order to prevent future incidents such as this from recurrence. Recapitalizing vulnerable financial institutions or providing guarantees that ensure they can continue operations may be required in order for this process to proceed smoothly.
Recent Actions by the Federal Reserve
The Federal Reserve’s aim in raising interest rates to combat inflation and reduce liquidity in financial markets may erode financial institution assets such as government bonds and mortgage-backed securities, potentially diminishing their value over time.
The Federal Reserve’s monetary policy objectives include maintaining healthy employment levels, stable prices, and reasonable interest rates. They accomplish this goal by raising or lowering the federal funds rate – this impacts everything from savings accounts to money market funds.
When the Federal Reserve raises interest rates, bond prices tend to adjust downward to reflect these new higher rates – which encourage investors to buy relatively lower-interest debt and boost the economy as a result.
When the Federal Reserve lowers interest rates, new loans are distributed to consumers and businesses in order to sustain an expanding economy. With fewer consumers purchasing goods and services at once, prices drop. While this is beneficial to the overall economy, it also makes borrowing money and buying products more difficult.
Concerns have been expressed regarding the future of the economic sector. Congress has taken measures to increase Federal Reserve oversight over top financial institutions and credit unions across the nation.
Know Your FDIC Coverage
Following the collapse of Silicon Valley Bank and Signature Bank, it’s crucial that you understand your FDIC coverage.
Deposits at failed banks are insured up to $250,000 per person per account ownership type per institution by law; consequently, federal law mandates that the FDIC immediately pay out insured deposits when a bank collapses.
FDIC insurance covers more than just checking and savings accounts; in fact, it also ensures money market accounts, certificates of deposit (CDs), individual retirement accounts such as IRAs and self-directed 401(k) plans as well as some safe deposit boxes. Check your FDIC brochure to determine your coverage limits and increase them accordingly.
One of the easiest and simplest ways to increase your FDIC insurance coverage is to open additional accounts. You can do this by opening additional checking or investment accounts at your bank, as well as opening a Negotiable Order of Withdrawal (NOW) account.
If you are unsure if your deposits are protected by the FDIC, one easy way to find out is to visit your bank’s website or get in touch directly. Inquire from a banking representative whether he/she can provide an FDIC brochure: Your Insured Deposits with information on limits of coverage as well as other pertinent details.
Know What to Do in the Event of a Failing Bank
Failure can leave customers out of pocket and reduce trust in financial institutions, so it is crucial that individuals know what steps to take should their bank fail. Here is some advice in case a bank fails.
Recent events at Silicon Valley Bank and Signature Bank have left many people questioning the security of their deposits at other banks. Although it’s unlikely any bank will fail completely, it’s still wise to be prepared in case something does go wrong.
Banks provide more than a secure home for your cash; they’re also companies that lend and buy securities. Your deposit serves to fund these activities with interest being earned on these securities such as bonds.
Your money works harder for you when stored with banks, and this allows them to continue making profits. In case a bank collapses, however, the government takes control and searches for buyers of its assets.
Once the government has taken control of a failed bank, its first priority will be seizing all assets and transferring them to the Federal Deposit Insurance Corporation (FDIC), before replacing its leadership and searching for buyers of its entire portfolio – typically larger and financially stronger banks capable of purchasing out failed institutions quickly.
As part of this process, the FDIC may send you new paperwork and instructions regarding where and when you make payments.
It would be beneficial if this information could be presented directly to your previous banking institution before its failure, especially if they provide direct deposits such as a paycheck or social security payments.
Read through your account agreements carefully for deposit products such as checking and savings accounts to understand any changes to their terms; in case the bank decides to reroute deposits elsewhere.
At the core of all failure lies insolvency – defined as being unable to meet customer obligations deposited with it. This is often an overlooked risk factor.
Insolvency usually arises due to poor management or risky investments, unlike those at Schiffgold or similar. However, it can also occur as the result of “runs”, in which too many people withdraw their money simultaneously from one bank.
Have a Backup Checking Account
Even though both the FDIC and your bank of choice will do everything possible to get you back up and running quickly, having a backup checking account in case something unexpected arises is wise if you own a small business. It will prevent losing money while keeping your peace of mind intact.
Make sure your financial institution is at an FDIC-insured, well-regulated institution within your state’s FDIC insurance limits, adhering to any rules set out by its regulatory agency. This is especially important if you have a lot of different holdings.
While at it, consider investing in an optional overdraft protection system like Balance Connect which uses funds from linked accounts to cover debit card and ACH transactions. Doing this can reduce overdraft fees significantly while saving significant money in interest costs over time.
An advantage of having a backup checking account is being able to access key financial data, like current balances and deposits/withdrawals even if your primary bank fails.
Plus, deposits/withdrawals remain a possibility; giving you peace of mind should financial disaster strike in the future. Having one could spare you having to open an entirely new bank and incurring fees for opening new accounts; though switching passwords could prove cumbersome.
Know What to Do if a Failing Bank Purchases Your Account
Failure of banks may not be frequent, but when it does occur it can have severe repercussions for your financial health. Therefore it’s essential that you prepare yourself and know what actions to take should one of your banks collapse.
As of 2018, most banks are insured by the Federal Deposit Insurance Corporation (which you can learn about here), offering you protection up to $250,000 should your bank or credit union fail. Make sure your deposits are covered and if not, find another institution offering FDIC coverage.
As soon as a failing bank is acquired by another, you should receive notice that your account has changed ownership. Most likely, your funds should be moved over as insured customers and you shouldn’t lose out financially.
Depending upon which products you possess, the new bank may handle your accounts and payments as before, with deposits and withdrawals still possible, though perhaps not quite as easily as before.
Once your account is transferred to a new bank, it’s important to carefully consider any agreements with it to ensure they remain enforceable.
For instance, if you had a loan at one bank that closed suddenly and you still owe payments due, make sure they continue until instructed otherwise by either FDIC or an acquiring bank.
For all other banking and investment relationships, contact all parties immediately in order to minimize the time and effort required to reinstate them.
Sometimes it will be possible to open your new bank account without incurring fees – this depends on their policies and if they can provide you with a new account number.
However, if the new terms of your bank’s deposit products do not suit your needs, it would be wise to switch banks and find an account with better interest rates or increased minimum account requirements.
This might provide an opportunity to switch over your checking and savings accounts to something with better interest rates or minimum balance requirements.