Should You Change Banks?

Last month, I covered the Silicon Valley Bank failure – but the hits just kept on coming. Next, it was Signature Bank in New York, followed by First Republic Bank in San Francisco. In terms of assets (and adjusting for inflation), the sum of these three bank failures is greater than the sum of all 25 bank failures during the Great Financial Crisis.

And it looks like PacWest could be next.

So, if you’re banking with a small or regional bank, should you take all your money out and move to a bigger bank?

Probably not.

By the way… if you’re looking for one place that will help you pull all of this retirement stuff together, then check out the Retirement Adventure Club.

The situation we’re seeing right now is much different than what we saw during 2008 and 2009. Back then, all those subprime loans were sausaged together into investments that were eventually given a credit rating of AAA. So, nobody knew who had what. Throw in a few credit default swaps and voila… the whole system seized up.

What we have today isn’t so complicated that it requires a bubble bath explanation from Margot Robbie.

The banks that are failing today are just bad at banking.

They invested a lot of their deposits into long-term Treasurys. Normally, this wouldn’t be a bad thing — until interest rates start rising like they did last year.

Because when interest rates rise, bond prices fall.

During the course of normal business, they started selling some of these long-term bonds at a loss. To shore things up, they went out and raised funding, which caused some of their big depositors to freak out.

And there’s your bank run.

So, now that all of this has been in the news, any bank with a janky balance sheet is at risk.

On top of this, small and regional banks need to offer more competitive rates to attract (or keep) customers. Sadly, this squeezes their margins when big banks are only offering 0.01% interest on savings accounts.

This puts more pressure even on smaller banks — even ones with sound balance sheets.

But this squeeze affects depositors less than the people who own these banks’ stocks. So, while some of these regional banks’ stocks may be down, they could very well have a healthy balance sheet and be in no jeopardy of failing.

It’s important to note that, as of right now, no depositors have lost any of their deposits.

Should You Change Banks?

So, should you give up on your small bank, regional bank, or credit union? Not necessarily. These banks typically have lower fees, pay more in interest, and often have better service. There’s still an important role for them within the communities they serve.

If you’re thinking about changing banks, there are a few things to consider. First, never exceed the FDIC deposit insurance limit with any bank. The general rule is that $250,000 per depositor is covered.

Next, if your bank does end up being acquired (such as First Republic, which was purchased by JP Morgan), you may not notice any interruption at all. The logo on your statements will change, but business will go on as usual after the acquisition.

If something crazy happens with your bank and the FDIC has to step in, there may be a couple of days that you may not have access to your funds. But as long as you’re under those insurance limits, there’s no need to stress. The FDIC is going to do everything it can to act fast and give everyone confidence in the banking system.

If you still find all this too stressful, then maybe a big bank is a better option for you. They’re certainly more convenient (until you actually need to talk to a human). You may not quite get the same interest rates, but then again, your peace of mind is worth something too.

There’s another option for you to consider as well. Remember, your brokerage accounts are protected too. Instead of the FDIC, SIPC insures up to $500,000 of your investment assets (up to $250,000 for cash). Of course, this protects investors in the case of a brokerage firm going under — not an investment loss.

Investing in some short-term Treasurys could be an interesting alternative with some decent yield now that rates have gone up. But be careful going on a quest to find more yield…

So, when you hear more about the banking crisis in the news, it’s the stockholders of those banks that may have the most at risk. In cases like this, another bank will step in and buy their business at a nice discount.

If depositors start losing money, then we have a problem. But we’re nowhere close to that right now. If you’re going to call what’s happening right now a banking crisis, it’s more of a crisis for the banks themselves (and their shareholders). The depositors can sleep well at night for now.

If you need help figuring out how to structure your cash savings, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.

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