EPS 13 - Bank Failures & FDIC Explained: How to Protect Your Deposits

SPEAKER_02: 1:05

Jerry and I'm back it's been a while since I've had the opportunity to get behind the mic and kind of take an opportunity to spread some news and help educate you guys and I guess give you some food for thought I had a very difficult time with health and Some mental issues as well, you know, some depression and some all kinds of health issues, including COVID. So it's been crazy, crazy, crazy for me. But I think all that's kind of behind me now and moving on. But one of the things that piqued my attention recently was this whole bank failure, you know, and I think that. The last time we really saw any systemic failures of banks was back in 2008 when we had the financial crisis. I think some people might remember that. I think most people do, but maybe you don't. In that case, just as a little primer, we had a significant number of banks that failed, and there was a huge concern that it could collapse the entire U.S. economy. And so they had to put the brakes on the banks, period, and make sure that there was not a bank run. And what that means is the FDIC insurance had to step in and make sure the banks were solvent, along with the government had to put some money out there so that the banks could make sure that they were able to cover depositors' money. So similarly, right now, the two banks that collapsed most recently, the government had to step in and do the exact same thing. However, there are some differences here. So let me back this up, though, and just talk briefly about what happens when you put your money into the bank. So as we know, when you deposit your paycheck or you put some cash into the bank, you put it in your checking or savings, whatever, right? And then the bank doesn't just hold on to that cash and pay you simple interest, right? What they usually do is they take that money and they lend it out to other people. People who need to take out a loan to buy a house, to buy a car, to start a business, whatever it is. So the bank charges them, you know, interest, higher interest than they're paying you. And then they keep the difference and that's how banks make money. just in a very basic level, right? So then when you go to the bank and you want your money out, you make a withdrawal and the bank has the cash and they give you your money, whether it's partial or full withdrawal. That's just how banks are supposed to work. Well, in the case of these banks, what happened was when the banks were out there taking depositors' money, They were taking that money and they were investing it in bonds. And bonds pay interest to the bond holder. that's an incentive for them to lend this institution money. So if I float a$1,000 bond and I'm paying a 3% interest rate to the bondholder, then that bondholder says, hey, that's better than what I'm getting anywhere else. I'll take the 3% and I'll buy your bond. And the bank says, great, I'll give you 3% interest for this length of time, one year, two year, 10, whatever it is. So that's all good until interest rate goes up. And when interest rates go up, if let's say current interest rates are 5% instead of 3%, then of course, what are you going to do, right? You're going to sell your 3% bond and you're going to buy the 5%. So in that case, then when these bonds are submitted, then the bank has to give you your money back, okay? So pretty simple so far. But what happened is that bigger depositors like, businesses who don't simply have you know five ten thousand dollars in the bank we're talking millions of dollars in the bank and when they get scared and they decide to pull their money out then that's a huge huge concern for the bank because if let's say they start having these multi-million dollar withdrawals, then they got to come up with the cash, right? So they have to then start selling things to try to recover the money that they need to pay these depositors. The more people that do that causes more stress on the bank. And ultimately, if they don't have the cash, then things start to go south. And then the bank could eventually go belly up, which is the case of these banks. And then the bank will actually go into receivership and the FDIC will step in, they'll take the bank over, and they will work on settling all the depositors' accounts and taking over the bank and ending up either restructuring the bank, selling it, or liquidating the assets, whatever it is. FDIC insurance is what you really want to look for when you're a depositor. And that just means, hey, the government says that we have the ability to make sure that you feel confident about putting your money in this institution, this bank. So if you deposit your money with this bank, we're going to guarantee that should the bank go belly up, that we're going to give you your money back. Now that sounds pretty good, right? So that you get your money back no matter what happens in the bank, that gives you a certain level of confidence. However, the most that they're willing to insure you for is$250,000. So if you're a small depositor, that could be more than enough for you to feel that that's all the money you have and that's fine. But again, if you're talking millions of dollars and you're only getting$250,000 covered, that could be a problem. And even with the average person, let's say,$250,000 starts to add up if you have it all with one bank. So, you know, we've always heard that old saying, right? Don't keep all your eggs in one basket. So what that means, though, is if, let's say, you have$300,000 in your savings and then you have an IRA that has$750,000 and then you have some savings bonds and you have, you know, your children's college savings account and a few other things. So again, per your individual name, your person, me, Jerry, let's say, if I have an IRA and I have my checking, I have my savings, et cetera, they're only going to cover me up to$250,000. And that may run out pretty quick. So what you want to do is structure your accounts to make sure that you're covered. And so the bank can help you, or your financial advisor can help you, or you can even call the FDIC and have them help you. And even on the FDIC.gov website, they have a tool where you can play around and put your information in there, and they will tell you how much of your assets are covered, up to$250,000. So... Ideally, though, you want to spread your wealth around so that you're covered. And a lot of good financial advisors will make sure that you don't have too much exposed in terms of liability at any one financial institution. They'll make sure that either your accounts are titled as such so that you don't run into that problem, or again, that you have different banks doing different things for different reasons so you're covered up to that level. Now, If you like your bank and you want to keep pretty much everything that you have, maybe have a certificate of deposit and you have your checking, you have your savings, et cetera, and your IRA there, and let's say it's right around the$750,000 level. Well, you do have that$250,000 per year name, but you can also do a couple things that will help spread out the level of risk. For example, on your checking account, you could have, you know, Jerry, payable on death to, you know, my husband, right? So in that case, both he and I are both covered up to that$250,000. And if I have$300,000 in my checking,$250,000 is covered for me, and then the remainder would be covered under my husband. Okay, so that would be fine, right? I'm Again, it could be a problem, but it depends on the beneficiaries that I have as well. So in my name, again, up to$250,000, if I have one beneficiary, again, he's covered to$250,000. If I have multiple beneficiaries, then they are each covered for that$250,000. As well as, let's say that you have, again, your certificate of deposit out there, and that has, let's say, half a million dollars in it. So... it may be a good idea to change the registration of that certificate of deposit and put it into, let's say, a living trust. So in the case of a living trust, you're the grantor, meaning you put the money in there, and then you have who the trust is for. It could be for yourself, your wife, your husband, whomever. And so... each of the people who are beneficiaries of that trust could also be covered up to that$250,000. In fact, the FDIC recently put some new rules that are in effect as of April the 1st, and that just means that they made changes in revocable trusts, including payable on death and irrevocable trusts as well, meaning trusts that once you put the money in there, it can't be taken out. It's strictly for the beneficiary. So once it's there, it's there forever. versus a revocable trust, you can move the money in and out. Hence the reason it's revocable. Anyway, just... in the grand scheme of things, they made it easier and less complex in some of their rules so that, again, you can get more of your money covered. And that's up to$1,250,000. And that's just saying in your total deposit accounts. So if you have a lot more than that, then again, you need to really work with your financial advisor to structure things. And if you're just an average depositor, again, you want to make sure that you're fully covered, work with your financial advisor, use the tools that are available out there, and spread out that level of risk. Because in the case of the banks in Silicon Valley, in that case, the bank did not have a very diversified portfolio. They lent a lot of money to startups, and they were all in predominantly the tech sector. So when the tech sector started feeling stressed, then what I'm meaning in stress is that a lot of the tech sector started laying people off and it became more sketchy in terms of what's really going on in the tech sector, right? Is it healthy? Is it about to crash? What's going on? So when people get skittish, right, they want to protect their money and they want to have it close to them, so they start pulling their money out. Or if they have to do things like, you know, meet payroll or they got to do something else, then they will start, again, gathering their assets to make sure they're liquid, not tied up in anything so that they can use it as they see fit. Again, if that's going to the bank and requesting your money, the bank has to honor those withdrawals because, again, that's the money that is on deposit that is their customers. It's not the bank's, it's the customers, and they have to meet those obligations. So nevertheless... When these banks tried to liquidate some of their assets, then again, they ran into the problem of the interest rate changes, and then they ran into liquidity issues, and then it just was a snowball downhill. Obviously, then the banks got in trouble, and the feds had to step in and take the bank over. Long story short, the government said, hey, you know what? We don't want a run on all the banks because if people start getting scared and people go to their own bank, you go to Citibank, you go to Chase, you go to Capital One, what have you, and everybody starts to feel uncomfortable about their money being in the banks, then that can start a bank run. And that bank panic then can set in. And then this compounds the issues and becomes bigger and bigger and bigger. This happened back in the 1930s, you know, during the Depression, and they had to halt all the withdrawals from the banks. They closed all the banks for a bank holiday to make sure that the banks were solvent so that they didn't go completely belly up and that the entire U.S. economy went to kaput. And that was the start of some new banking regulations, and that also started the FDIC back then. So FDIC is really good. It's helpful. We need it. The government in this case said, regardless of how much money you have on deposit at these banks, we're going to make you whole. And that's a little tricky, only in the sense that they've gone beyond the$250,000, which all depositors are guaranteed, and that's how it's been forever. And so they just stepped in and said, no matter how much money, nobody's going to lose any money. well, you know, if I'm a depositor, and I've got, you know, a couple million dollars, I'm grateful, right? I'm like, hallelujah, I don't want to lose any money. But again, that I don't know if that's a temporary situation, or they're going to make that wholesale change across the board. Or if this is just a one time deal, and they're going to revert back to their$250,000 policy, I don't really know remains to be seen. Like I said, we'll just see how things shake itself out. But I'm going to go with As things stand today at$250,000, you need to reassess where you're at, take a look at your registrations, and if you have individual accounts, maybe put them in payable on death, put them in trust, maybe add a joint holder if you want to. Again, if you do that, then you're giving up ownership of that. Let's say you do an individual account, Jerry and Dalton, and now we're going to go Jerry and Dalton with joint tenants with rights of survivorship, meaning if I go, he gets the entire account. If he goes, I get the entire account. We split up, it could go 50-50. There's some other rules associated with that, but on a very basic level, again, we each own the account. And then all that really means sometimes is it gets a little tricky, meaning have you ever taken any money out and you can prove you didn't, Anyway, some things that could mess up that joint tenets with rights of survivorship, meaning just because it's there doesn't mean it's completely there. there meaning again it may not go your way if you don't do certain things like take some money out i know that sounds kind of weird and strange but you have to kind of prove that you have ownership and you had access and you had the ability and you did take some of the money out because it was hey half yours anyway i've seen that happen in some circumstances like divorce especially so It just is one of those things that can happen, but ideally you want to use the account to a certain degree. If someone puts you on it, use it. It doesn't mean you have to take all the money out and spend it. You can take the money out, show that you had possession of it at one point, and you can put the money back in or whatever. So, again, just something to keep in the back of your mind. It's a really good idea when you're doing your estate planning. But even if you're not doing your estate planning, you're just looking at the level of risk and the exposure that you have in that risk and make sure that you're covered. And if you don't have a bank, make sure that when you go to the bank, it is FDIC insured. They usually have that little sticker on the door and that shows you. But you can just simply ask, hey, are you FDIC insured if you're unclear? Sometimes I do know that if you ask some of the bank employees, hey, how much am I My accounts are covered. sometimes the front line at the bank isn't going to be able to answer that question. You know, the tellers may not really be the best resource to help you with that. You might have to go to the manager or the manager may even say, you need to work with your financial advisor. You know, we don't want to have that level of exposure and tell you you're guaranteed this coverage. You know, I don't know. I'm just saying I ran up against that too, you know, in my career that sometimes the bank employees kind of punted. They didn't want to be held liable for the information that they gave if it was wrong. So I'm just saying, you got to just make sure that you dot your I's, cross your T's, and get the right information. And generally, again, when you're working with a financial advisor, that's the best way to make sure that you get the right information. If you feel that your advisor doesn't know, ask him or her, and if that explanation seems a little weak or they're not sure, you need to find somebody else who can give you the assurance that you need. But generally, good financial advisors will be able to tell you your level of exposure and make the recommendations that you need. But Beyond that, you can spread your level of risk around. Use a couple banks. I always use a couple banks because certain banks do different things. Just spread your risk out. It's just a good idea. Like I said, don't keep all your eggs in one basket. That's just a general golden rule that you always want to use, whether you're investing, savings, what have you. You know, you always heard that saying, it's there and it's for good reason, okay? So I think that's pretty much it. Again, you can go to fdic.gov and you can get some more information and you could use their online tools to make sure you can, all your accounts are covered and you'll see how much your level of risk is exposed. in regard to deposit insurance. So that's pretty much it with me. I'm going to take you out with a little bit of Sylvester, and it was good speaking with you guys, and we will talk next time.