Techniques Corporations, The Rich, And You Can Use To Avoid Bank Panic

You’ve probably read more than plenty about how banks got into trouble. There “safe” bonds with low yields from pre-pandemic days that banks could only count at full value by treating them as something they would hold to maturity. The realization that banks were in trouble suddenly sent off depositors with far more in their accounts than the $250,000 federal bank insurance would cover to yank their funds and move to bigger institutions with presumably more liquidity.

It was contagion in a world of electronic money movement, with no need to stand in line before a teller’s window.

Only government regulators and Treasury officials agreeing to make depositors whole at SVB
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— but not necessarily anywhere else as Treasury Secretary Janet Yellen eventually admitted under questioning — cooled things down.

The irony is most people or startups with more than the maximum insured limit could have exercised other options in advance and avoided a panic.

The rules are available online and aren’t difficult to comprehend. They presume that you’re doing business with a bank that is covered by the Federal Deposit Insurance Corporation and that you use one of the allowable types of accounts:

• Checking accounts
• Negotiable Order of Withdrawal (NOW) accounts
• Savings accounts
• Money Market Deposit Accounts
• Time deposits like Certificates of Deposit (CDs)
• Cashier’s checks, money orders, and other officially issued bank items

FDIC doesn’t cover such things as stock and bond investment accounts; mutual funds; life insurance policies; annuities; municipal securities; safe deposit boxes and their contents; or U.S. Treasury bills, bonds, or notes.

Here is one path to safety for most people: “The standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.”

Here are the ownership categories:

• Single accounts
• Certain retirement accounts
• Joint accounts
• Revocable trust accounts
• Irrevocable trust accounts
• Employee benefit plan accounts
• Corporation, partnership, or unincorporated association accounts
• Government accounts

If you have accounts in different owner categories, in different accounts, or in different banks, each variation gets its own $250,000 limit.

“For example, if a person has a certificate of deposit at Bank A and has a certificate of deposit at Bank B, the amounts would each be insured separately up to $250,000,” the FDIC explains. “Funds deposited in separate branches of the same insured bank are not separately insured.”

Well enough. Similarly, if you have one account and share a second joint account where both parties are entitled to withdraw money, those each get their own $250,000 limit. Say you have a personal account and a corporate or partnership account. Even if they are at the same bank, each gets full coverage.

Here’s another FDIC example:

“Marci Jones has four single accounts at the same insured bank, including one account in the name of her business, which is a sole proprietorship, a money market account, savings, checking, and CD. The FDIC insures deposits owned by a sole proprietorship as the single account of the business owner. The FDIC combines the four accounts, which equal $260,000, and insures the total balance up to $250,000, leaving $10,000 uninsured.”

Maintenance of multiple accounts can, certainly, be an annoyance. But it does expand what FDIC insurance can and will do for you, whether or not Secretary Yellen is so inclined.

It’s worth going to the link and reading it, as there are more examples: A revocable trust with one to five separate beneficiaries gets coverage of $250,000 for each beneficiary in the one account.

Spread your money among accounts at different banks and you increase the coverage.

You can also go through the same, per person, per institution, per ownership category at a credit union that is a member of the National Credit Union Administration.

Find a bank in Massachusetts — yes, the only state that has this — that is a member of the private Depositors Insurance Fund. DIF insures all amounts above the $250,000 FDIC limit and ultimately has never seen a depositor lose a penny. It doesn’t cost anything extra. Not all banks are members, but there’s a list on the DIF site with all the participating institutions.

You can use one of the network approaches, where money is kept spread across a series of FDIC-insured banks, although you get control through one account. Wintrust has its MaxSafe account that can provide coverage of up to $3.75 million per account holder. Similarly, the IntraFi network says it has thousands of member institutions. Your money is split up among multiple banks to increase the effective amount of total FDIC coverage.

Anyone with more than $250,000 can use any of these techniques to protect their holdings. But only if they bother to find out and then take the necessary action. Had the people who pulled money out of institutions not done so because they weren’t ultimately at risk, there might not have been a bank panic at all.