With the recent banking crisis and turmoil in the financial industry, we’ve all been asking big questions about our banks. Namely, “Is my money safe?” The failures of Silicon Valley and Signature bank didn’t make us feel good, nor did the takeover of Credit Suisse by its smaller (but better-run) competitor UBS. Last week, First Republic was teetering on the edge, but now seems to have rebounded.
In other words, we’ve all been worried about the health of our financial institutions. Last week when HerMoney checked in with Karen Finerman, investor and CEO of Metropolitan Capital Advisors, she told us that bank stability “all depends on what [a bank is] doing with their deposits.” But how does a person go about looking into that? We wanted to find out exactly how consumers can investigate and get the answers they need. Because if these last few weeks made anything clear, it’s that we need to do just as much homework — if not more — on our banks as we do our investments. Here’s a look at some of your bank stability FAQ, answered.
Are there ways an individual can stress test their bank?
Yes and no, explains Kristen Ragusin, Senior Vice President of Investments at Raymond James and author of the book The End of Scarcity: The Dawn of the New Abundant World. Information can be discovered – whether it’s the capital adequacy ratio (the amount of capital a bank has available, as a percentage of its risk-weighted credit exposures) or the solvency ratio (a debt evaluation metric to assess how well a bank can cover its outstanding debts) and you can simply go to your bank and ask for this information.
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The problem is that these numbers don’t tell the whole story — First Republic Bank and Silicon Valley Bank would have passed these “tests.” That’s because unfortunately bank insolvency isn’t usually caused by one or two bad investments, rather by an overall mismanagement of capital, and seeing down through those many layers is not always possible.
What level of financial expertise does one need to know if their bank is invested wisely?
“I would argue that most economists don’t even understand banking,” Ragusin says. Most individuals, therefore, don’t have the ability (or the time) to stress test their banks. But there is good news here: If we focus on the FDIC guarantees, we’re okay. (As a reminder, the FDIC insures individual accounts of up to $250,000 and joint accounts of up to $500,000.) But Ragusin cautions that ideally you’ll stay around 5% below those limits to ensure you’re always protecting any interest you earn as well.
Given the choice between a neighborhood bank, a regional bank and mega-bank, what’s the best option?
Go local – to your local bank or credit union, Ragusin says. It’s really nice to be able to walk into a bank and talk to people who work there. The banking system works best when it’s concentric circles outward – from local, to regional, to national/international. Local banks invest in the businesses in your community. They put their capital to work where you see the benefits.
Is the FDIC fully funded to cover losses?
No. It’s probably 2% funded. But it is in the government’s interest to fund all insured losses. When you print your own money, there is no limit to the money supply — although the amount of money in circulation can affect the value of that money, Ragusin says.
The recent bank failures have left many people asking if deposits should be fully guaranteed by the FDIC, with no cap. But the problem with that, Ragusin explains, is that “if everything was insured, it would give banks a bigger green light to be irresponsible lenders. The world of banking and finance needs to have a risk reward relationship, that’s what makes opportunity valid.”
What about money market accounts — are they insured?
Yep, money market accounts are insured like checking and savings accounts. However, a money market account is different from a money market fund. A money market fund is a risk-oriented investment and is not insured by the FDIC, though it is protected by SIPC for up to $500,000. In these uncertain times, return of principle is more important than a return on principle, so it’s important to know the difference.
Are the bank failures done?
“I don’t think they’re done,” Ragusin says. “But the problems may make the system stronger. Ironically, instability creates stability, stability creates instability. Money is trust.” But it’s important to remember that banks are always closing or being taken over.
We just have to maintain enough stability to get through this, Ragusin explains. “There are many positive happenings taking place in the real economy, and I am optimistic, even though it’s tough to see all the possibilities in the midst of periods of acute concern.”