It is very important for the economy that banks keep people’s money safe and is available when they need it. Most people borrow money from a bank to purchase a home or start a business. Many use bank-issued credit cards and have other loans to make home improvements or buy a car. Some of the bank’s money comes from investors who own shares of stock in the bank holding company. Most of the money they lend to borrowers comes from deposits from the bank’s customers. The bank pays them interest for their deposits and then lends out the surplus money at a higher rate of interest to borrowers.
Banks have a good idea of how much float or available cash they need to have on hand each week. People do not need to withdraw all of their cash at once and are sometimes encouraged to make longer-term commitments by receiving higher interest rates in things like certificates of deposit. To help protect the banking system, the government has lots of rules about financial ratios that banks must maintain and rules about what assets can be invested in. Banks also contribute fees to provide FDIC insurance for bank accounts up to $250,000.
In the past week, we have had the second and third largest bank failures ever. The first was Silicon Valley Bank. Its main office is in California, and it had many customers in the tech industry. It was the country’s 16th largest bank with assets of $209 billion. Banks are only allowed to invest in several different safe assets. Many consider the safest of all to be U.S. government bonds because they are backed by the full faith and credit of the United States.
Silicone Valley had huge amounts of these bonds on their balance sheet. While bonds are considered safe, the worst time to own them is when interest rates are going up. Bond values go down when this is occurring. The Federal Reserve has been raising interest rates all year to deal with 40-year high inflation. This has caused the portfolio of SVB to go down. Word got out that they have to bring in more capital. All of a sudden, there was a run on the bank and people wanted to withdraw all of their money. No bank has these types of reserves on hand and it is not really necessary to have, as this is an event that should not happen.
The bank doors were locked as the government moved in to protect depositors. Everyone with an account valued at $250,000 or less was covered by FDIC Insurance. The government is working to get a bigger bank to take over all accounts. It has been announced the bigger account holders such as companies will be made whole and get their money shortly so they can make payrolls and continue to operate.
The other bank failure this week was Signature Bank, which was very involved in crypto currency. It had many similar problems. These regional banks do not do the same stress test as the few biggest super banks have to meet. Your money is safe in the banks, especially when your balance is under $250,000. In fact, if you have too much money in banks, you may be losing money safely because of inflation. Have a written financial plan and have your assets allocated in an organized way. Realize that inflation and higher interest rates will probably be with us for a while and that your investments match your risk tolerance.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.”
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