News cycles move fast in the 21st Century, so the failures of Silicon Valley Bank and Signature Bank are already fading into a distant memory. If you were lucky enough not to have deposits at those banks, it’s easy to forget that many business leaders suffered through a sleepless weekend, worrying about how they were going to make the next payroll, keep their loans current, and survive the loss of millions of dollars of deposits. Even businesses who did not have deposits at the closed banks had to worry about receivables that might be affected by their customers’ inability to pay. As it turned out, the government swooped in with a rescue plan and assured depositors that 100% of their deposits – not just the first $250,000 – would be covered by insurance. But the government took this action as an exception to the rules; it did not change the rules. This means deposit insurance is still limited to $250,000 and business leaders (and, for that matter, individuals) still need to worry about the next bank failure.
Lesson #1 is that depositors should worry about the next bank failure. There were many factors that led up to the government’s decision to cover the failed banks’ deposits, ranging from the desire to calm the public’s jitters to the need to respond to the strident calls from tech industry leaders. This last point sets the Silicon Valley Bank failure in a unique posture: as a tech-centric bank located in the heart of tech country, Silicon Valley Bank was holding billions of tech-company dollars in uninsured accounts. In fact, 94% of Silicon Valley Bank’s deposits were uninsured. Tech business leaders, many of whom have direct connections to the nation’s political leaders and are sophisticated social media users, took to the internet to convince politicians, bank regulators, and the public that what was good for the tech companies was also good for the country and, conversely, what was bad for the tech companies would be disastrous for the country. Without the unified and singularly effective voice of the tech industry, the failure of Silicon Valley Bank might have played out very differently. Depositors should assume this perfect storm of mitigating factors will not be present for the next bank failure.
Lesson #2 is that not all bank regulation is a bad thing. I have been a bank regulatory lawyer for more than 40 years and I’ve torn out my hair with the best of them over nonsensical and duplicative regulations. But the answer is sensible regulation, not no regulation. The quid pro quo for federal deposit insurance should be a commitment to protecting depositors’ interests and minimizing the need for insurance. This is not to say banks should not be innovative or profitable, but they must be thoughtful, balanced, deliberate, and responsible about how they operate their businesses.
Lesson #3 is that depositors should also be thoughtful, balanced, deliberate, and responsible about where and how they keep their money. In this context, bank failures are only one piece of the puzzle: even large banks that are thought to be “too big to fail” can suffer computer glitches (remember Southwest Airlines over the 2022 holidays?) or ransomware attacks (how many hospitals have had to limit or suspend patient care?) that can make depositors’ funds unavailable for a few hours or even several days. Depositors should keep money in a Plan B account that can be drawn on if their primary account is unavailable.
Lesson #4 is that depositors should investigate ways of increasing protection for their financial assets. For individuals, this may include holding deposits in different “ownership capacities”: the FDIC insurance limit is $250,000 per institution per ownership capacity, so a couple can protect $1,000,000 at a single institution with two individual accounts and one joint account; another $1,000,000 with certain kinds of revocable trust and IRA accounts; and another $500,000 per child in a revocable trust account. SIPC insurance is available for assets held at an SIPC-member brokerage house: the SIPC limit is $500,000 (including up to $250,000 in cash) and also applies on a per brokerage house per ownership capacity basis. For both individuals and businesses, deposit placement programs may be a solution: through these programs, funds deposited at one bank (sometimes the depositor’s usual primary bank, if the bank offers this service) are distributed to a network of insured “destination banks” in $250,000 chunks, so each chunk is separately insured as a deposit in the destination bank. Funds held at a destination bank through this type of program will be aggregated for insurance purposes with any other funds the depositor holds at that bank, so the program needs to be managed to ensure no overlap between the destination banks and the depositor’s other banking relationships. Depositors considering using a deposit placement service should consult a bank advisor regarding their individual circumstances.
Please call your Hinckley Allen lawyer if you would like to discuss the recent bank failures or what you can do to protect your assets further.