Is Your Bank Safe? Key Insights and Actions to Take
If you've wondered, "Is your bank safe?" you're not alone. We're here to help you assess your bank's security and protect your finances.
Recent upheavals in the banking sector have sparked concerns about our funds. Events like the failures of Silicon Valley Bank and Signature Bank, alongside Credit Suisse's takeover by UBS, have heightened anxiety. Just last week, First Republic was facing difficulties but has shown signs of recovery.
People are understandably worried about the health of their banks. We spoke with an investment expert who emphasized that assessing a bank's stability hinges on understanding how it manages its deposits. But how can individuals investigate their banks? Clearly, we need to do our research on our banks just as thoroughly as we do on our investments. Below are some common questions about bank stability.
Can individuals stress test their bank?
Yes and no, says Kristen Ragusin, Senior Vice President of Investments at Raymond James. You can find information like the capital adequacy ratio (which indicates a bank's capital compared to its credit exposure) and the solvency ratio (which measures a bank's ability to cover its debts). You can request this data from your bank.
However, these figures alone don't provide a complete picture. Banks like First Republic and Silicon Valley would have passed these stress tests. Often, insolvency stems from broader mismanagement rather than just a few poor investments, making it tough to see the complete picture.
What expertise is needed to evaluate a bank's investments?
According to Ragusin, even many economists struggle to grasp banking complexities. Most individuals lack the time or resources to perform thorough stress tests on their banks. Fortunately, focusing on FDIC guarantees can provide reassurance. Remember, the FDIC insures individual accounts up to $250,000 and joint accounts up to $500,000. It's advisable to keep your deposits about 5% below these limits to safeguard any interest earned.
Neighborhood bank, regional bank, or mega-bank: What should you choose?
Ragusin recommends opting for local banks or credit unions. Engaging with local bankers fosters a better relationship, and these institutions typically invest in community businesses, providing tangible benefits.
Is the FDIC fully equipped to cover losses?
No, it's only about 2% funded. However, the government has an interest in covering all insured losses. As Ragusin explains, when you can print your own currency, there's no strict limit to the money supply, though it can affect currency value.
The recent bank failures have prompted discussions about whether the FDIC should guarantee all deposits without limits. Ragusin warns that doing so might encourage banks to engage in reckless lending, as a healthy risk-reward balance is essential in finance.
Are money market accounts insured?
Yes, money market accounts enjoy the same insurance as checking and savings accounts. It's important to distinguish between a money market account and a money market fund. The latter is an investment product and isn't insured by the FDIC, though it is protected by SIPC up to $500,000. In uncertain times, preserving your principal is often more crucial than maximizing returns.
Will there be more bank failures?
Ragusin believes we may not have seen the end of bank failures. Yet, challenges can lead to a stronger system. The relationship between instability and stability is complex—trust is the foundation of finance. While banks are continuously evolving, maintaining enough stability is vital.
Ragusin remains optimistic despite current challenges, highlighting positive developments in the broader economy, even in these turbulent times.