Bank Failures And The FDIC

You might have heard a lot of stories in the news about bank failures and the FDIC. This government corporation, also known as the Federal Deposit Insurance Corporation, is what insures deposits in financial institutions.

The FDIC insures $250,000 per depositor, per insured bank, for each account registration category. The FDIC was created in 1933 in response to the Great Depression when thousands of banks failed. Since the first day the FDIC was put into place on January 1, 1934, no depositor has lost insured funds as a result of a bank failure. It is important to keep in mind that it only insures deposits — not securities, mutual funds, or similar types of investments. Whenever a financial institution fails, the FDIC responds immediately to protect the depositors. Luckily, whenever the FDIC needs to get involved, it almost always is seamless from the customers’ point of view. The most common fix is for the FDIC to sell the deposits and loans of the failed institution and transfer to another institution.

What do banks invest in? How do they make money? Most of the time, they invest in real estate, commercial or consumer loans, government securities, and other public companies. Commercial banks tend to make most of their income through interest fees. They also make money by borrowing money at lower interest rates, then charging higher interest rates to their borrowing customers.

So why did Silicon Valley Bank fail? Basically, it failed because it traded in short-term investments for long-term investments, not considering a major change in interest rates. The leadership seemed to get more aggressive, and ultimately started to miss quarterly earnings, which concerned depositors.

The FDIC is there as a backstop to protect depositors against banks making bad investment choices. The problem occurs when depositors have more than $250,000 in each investment category. An investment category differentiation is, for instance, a CD and a savings account. Both would be protected up to $250,000. If you are looking at your bank assets and wondering if you are protected, simply ask yourself if you have more than $250,000 in each investment category. If you have below this amount, you are protected by the FDIC.

In the case of Silicon Valley Bank, however, those who had over 250,000 in each investment category were fully protected based upon the Biden administration. That is great news for Silicon Valley depositors, but if you have more than $250,000 at your local bank, do you think the government would bail you out?

The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

Jason LaBarge, financial advisor and president of LaBarge Financial

7 Riggs Avenue, Severna Park, MD 21146  443-647-4321

Securities and advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker dealer and a registered investment adviser. Cetera is under a separate owner named entity.