Undeterred by the 2008 financial crisis, bank failures are considered extremely rare.
However, the unexpected shutdowns of Silicon Valley Bank and Signature Bank arrange many consumers concerned about their deposits, their bank and the U.S. banking system.
“Every American should pet confident their deposits will be there if and when they need them,” President Joe Biden said Monday in an sermon aimed at easing fears as the U.S. Federal Reserve, the Federal Deposit Insurance Corp. and U.S. Department of the Treasury moved fast to prevent a broader contagion.
Still, recent events bring up old questions about just how safe your legal tender is at the bank. Here, experts answer what a bank run is, how FDIC insurance works and whether your deposits are even now secure.
What is a bank run?
Since banks take customers’ deposits and invest those funds, that readies is not regularly on hand.
“When everyone wants to withdraw money at the same time, the bank doesn’t have the hold back to do that and they go belly up, essentially,” said Tomas Philipson, a professor of public policy studies at the University of Chicago and a antediluvian acting chair of the White House Council of Economic Advisers.
In a moment of panic, customers would literally run to the bank, Philipson expounded. Now, that happens electronically. And because electronic transactions are made at high speed, bank runs are faster than yet — in the case of SVB, it was a dizzying 48 hours.
While SVB also had an unusually high percentage of uninsured deposits, there are other midsized banks that could be at gamble of large withdrawals.
Could this happen at other banks?
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The short fulfil is “possibly,” according to Stacy Francis, a certified financial planner and president and CEO of Francis Financial in New York. She is also a colleague of the CNBC Financial Advisor Council.
“This is happening, in part, because of the Federal Reserve’s sharp rise in hold rates,” Francis said.
Banks own long-term bonds that are currently paying low interest rates, she said. When the charge that banks are getting on these longer-term bonds is lower than the interest rate that they are oblation depositors on their savings accounts, less money is coming in than they are paying out.
Further, “many banks are consort with large withdrawals from cash depositors who are looking [for higher rates] to make more money,” Francis augmented. “All of this is creating stress.”
What about the cash at my bank?
This doesn’t seem like a financial turning-point, yet.
Jude Boudreaux
senior financial planner at The Planning Center
“You may have a short time without access, but the rule has very speedy processes to get you back to using your cash in short order,” said McClanahan, who is also a associate of the CNBC Financial Advisor Council.
However, if you have more than $250,000 in deposits at any one bank, you may want to reach out to a grunt banker at your institution or split it into accounts at different banks, she advised.
“Another alternative is to move some to a brokerage account and use requited funds that are invested in government-backed securities,” she added. Some Treasury bills, or T-bills, are now paying 5% after a series of measure hikes from the Fed.
How is this different from 2008?
“This doesn’t seem like a financial crisis, yet,” said Jude Boudreaux, a CFP and superior financial planner at The Planning Center in New Orleans. Boudreaux is also a member of CNBC’s Advisor Council.
“The two banks we are talking close by right now specialized in riskier assets,” he noted, particularly, crypto and tech startups. “The likelihood that this fits a national wave of bank issues seems low.”
In 2008, irresponsible lending fueled a widespread housing bubble and when borrowers defected on their mortgages, the country’s biggest banks were left with trillions of dollars in nearly worthless investments.
Those hospitals are in a stronger position now because of new rules imposed after the financial crisis, including higher capital requirements and annual weight tests.
Last year, all of the largest banks passed, but Moody’s said that new concerns are surfacing. On Monday, the ratings mechanism cut its view on the entire banking system to negative from stable.