How to protect your funds if your bank fails

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On March 10, Silicon Valley Bank (SVB), a lender to many technology companies, became the second-largest bank failure in U.S. history.

On March 11, my email inbox blew up, as did my voicemail. Clients were asking whether their funds were safe in their banks, and what they could do to mitigate any potential risk if their banks went under.

The SVB failure was one of the unintended consequences of the Federal Reserve’s rapid interest rate hikes, as well as other factors — a discussion for a later date. But in the coming months, there will be lots of finger pointing and the blame game will be well under way. Luckily in the case of SVB, the U.S. government stepped in and has assured all depositors they will get all their money back. However, it begs the question: What happens if your bank fails, and what can you do to mitigate your risk?

The first thing to know is that your banking relationship should be with an FDIC-insured bank. The FDIC, or Federal Deposit Insurance Corp., insures deposits in commercial banks. It was created by the Banking Act of 1933 to rebuild Americans’ confidence in the banking system during the Great Depression. However, the FDIC only covers up to $250,000 per depositor. While that is a lot of money, many of our pest management clients run payrolls that exceed that amount, and so they must have a greater amount of money in the bank to fund payroll.

When a bank fails, depositors may face losses if their deposits are not fully insured by the FDIC. We have seen that, as a practical matter, the government set up programs to make sure depositors did not lose their money when banks failed in the recent past. But this is not guaranteed.

Dan Gordon, CPA

Here’s what depositors can do to minimize potential losses:

• Open accounts at multiple FDIC-insured banks. This allows the business to spread its deposits across multiple banks, ensuring all funds are fully insured by the FDIC. While this may require some additional administrative work, it can provide added protection and peace of mind.
• Use different ownership categories, with each being covered up to $250,000. For example, an individual account and a corporate account are two separate categories, so this gives $500,000 of protection. If the individual account is turned into a joint account, then that adds an additional $250,000 of protection. Now the total amount insured by the FDIC is $750,000.
• Use a bank that participates in the IntraFi Network Deposits program. This allows you to get FDIC insurance on millions of dollars through a network of financial institutions without having to open accounts at multiple banks. Instead, you can keep all your money at one bank, and if that bank is part of the IntraFi Network, the program will funnel your money into deposit accounts of your choice at other network banks. For a list of participating banks, see IntraFiNetworkDeposits.com.
• Stay informed if your bank does fail. Keep up to date with any developments related to your bank’s failure. The FDIC typically will provide information on its website and through other channels about how depositors can claim their insured funds.

If you have an inclination your bank may fail, or if it does fail, protect yourself by following these strategies. More importantly, don’t panic.