Running is Good for You, Not for Banks

By Gary Silverman, CFP®

This week, we were going to continue our discussion on why stocks are an important part of a retirement investment portfolio.

But the big news is the collapse of the Silicon Valley Bank and more recently Signature Bank. I’m writing this almost a week in advance of publication, so who knows what will happen between now and when you read this.

There are a lot of very good articles detailing this saga so if you are interested in the details it should not be hard to satisfy your lust for knowledge. My plan today is to let you know what normal people need to know in order to keep themselves safe.

First, why did these banks fail? Well, as George Bailey (brilliantly played by James Stewart) instructed us in the movie It’s a Wonderful Life, banks don’t have your money sitting around in a vault. No, the money is loaned out to folks to buy their homes, to entrepreneurs to start businesses, to pay for college, buy cars, and a myriad of other things people do with money.

Here’s where it gets tricky: in most cases a bank can’t say “Give me the money back, now!” to its borrowers as long as those same folks are making regular payments. Yet you (in most cases) can make the bank give you your money now.

So let’s say, as in It’s a Wonderful Life, a bunch of you depositors say, “Give me my money, now!” In that case the bank has quite a bit in reserves. It will go sell some of those reserves and give you your money. These reserves are not unlimited, and the bank can run out of money if enough people want it (hence people running to the bank to get their money first). When depositors get wind of this, more of them panic and want their money now. This “run on the bank” is a spiraling descent into banker hell.

When that happens, the Federal Deposit Insurance Corporation (FDIC) takes over; and for most people when this happens, in a couple days their money is available to them again. IF THEY HAD $250,000 OR LESS IN THE BANK. For folks and companies that had more than that, the wait could be long and they might not ever get back all they put in.

This time the Feds have announced that they will make good on even the uninsured deposits. Please do not assume they will do this for any bank that fails. (I’ll have more to say about this in about a month, but my short take on it is 1) this is unfair and 2) this is necessary).

So, if you’ve got more than $250,000 sitting in a single bank account and don’t want to worry, just open another account at a different bank and split the money up. If you’ve got millions or billions things can get more complicated, but you can afford to hire someone to figure out what to do.

As I’ve said many times before, there’s risk everywhere—we’ll get back to that which involves stocks next week.