Treece Talk Blog

During early 2023’s bank failure economic scare, many clients contacted our team with questions about the security of their assets. While understandable, we were able to offer words of confidence because there are many financial safeguards in place that guarantee that your money will not disappear if and when a financial institution does. 

How does FDIC work?

The Federal Deposit Insurance Corporation (FDIC) was created after the Great Depression to give the American people the security they needed to invest in US banks. Currently, the insured limit per depositor per institution is $250,000. The median amount in a savings account is $5,300. 

FDIC accounts pay much less interest than other saving tools, but they are considered the safest since they are backed by the full faith and credit of the US Treasury. However, investing in a liquid, low risk savings account is an ideal place to have 6-9 months of wages stashed away for easy access in case of an emergency.

Deposited dollars don’t burn

You may think cash in hand is the safest investment. But, money hidden under a mattress doesn’t earn any interest, and, if the mattress ignites in flames there is no insurance within the sheets. 

In comparison, money in FDIC-insured accounts is backed by the US government, financially the strongest country with the “King Dollar” being used as the world’s reserve currency. T-bills are also risk-free for the same reason. By either depositing up to the limit in multiple banks or utilizing a deposit swapping network, a depositor could have over a million dollars fully guaranteed by the US. The depositor is safe from a run on the bank, fire, or act of war.

Ensured to be insured

Insurance companies are also insured, but by individual states rather than the federal government (Florida has $250,000 of coverage much like the FDIC for banks). Life and annuity insurance companies are remarkably stable in terms of financial health since they are required to have a lot of financial reserves. Even during the 2007 and 2008 financial crisis, it was banks that went under while insurance companies were stable.

Securing securities

The Securities Investor Protection Corporation (SIPC) protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially-troubled SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash. 

Investment account assets are custodied at large banks, such as Pershing, a third-party custodian, that offer significant protection. This paragraph from a NerdWallet article does a great job of explaining client protections:

“What happens if your brokerage goes out of business?

Even if your brokerage does shut down or become insolvent, other layers of protection will shield you from loss before the SIPC needs to step in. As (the Financial Industry Regulatory Authority) FINRA points out: ‘In virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm.’”

Those other layers of protection include regulatory requirements for brokerage firms to keep customer assets segregated in separate accounts from the firm’s own money and to have a minimum amount of liquid assets on hand—like an emergency fund for a broker.

Concrete measures to control financial risk

While FDIC, SIPC, and insurance company regulations offer a significant amount of protection, there is still an uncomfortable level of risk overall. The Fed raising rates so far and so fast has created instability. This is likely to be the case for a while longer. The economy still is quite strong with very low unemployment, and there is every reason to believe things will get back in balance, but with a lot of volatility in the meantime. 

Fortunately, both the Fed and the US government are committed to stability. The US government has created a borrowing facility for banks and has also eased rules on valuing assets so that banks aren’t punished by the decreased value of government bonds. 

Guarantees on annuities and investment money managers that reduce risk and go to cash in a market downturn offer additional strategic protection. These times require real proactive risk management—especially for those nearing or who are already in retirement.

Have additional questions about how to invest your money safely and securely? Give us a call—we’re here to help!

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Related Resources

When Banks Fail: How to Secure Your Investments

Reducing Risk in a Volatile Market

Treece Talk: All About Annuities