Safeguarding Your Wealth In The Face Of Uncertainty: Strategies To Thrive

Silicon Valley Bank, founded in 1983, was once the 16th largest U.S. bank. The bank served venture capital firms and numerous tech executives and had $209 billion in assets as of the end of 2022. Over the course of two days in March 2023, the bank failed, making it the 2nd major bank collapse in history.

The collapse occurred due to various factors, including:

• A lack of diversification 
• A bank run

Depositors withdrew their funds simultaneously due to concerns about the bank's solvency.

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A bank's failure may make you skittish about your capital. How could it not? This article will cover how to protect yourself and your wealth. 

What Is The FDIC? 

The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the U.S. government that protects the funds depositors place in banks and savings associations. The FDIC was created in 1933 in response to the thousands of bank failures in the 1920s and early 1930s.

How Does FDIC Insurance Work? 

FDIC insurance automatically applies to all deposit accounts at insured banks. The full faith and credit of the United States government back the insurance up to the insurance limit. The full faith and credit of the United States government back the insurance. Even if a bank fails, the government guarantees depositors will receive their insured balances.

What Protections Does FDIC Offer? 

FDIC insurance covers all deposit accounts, including:

• Checking and savings accounts
• Money market deposit accounts
• Certificates of deposit (CDs)

The protection is up to the insurance limit of $250,000 per depositor, per insured bank, for each account ownership category.

FDIC insurance does not cover the portion over that amount

What If An Account Exceeds The FDIC-Insured Amount And The Bank Fails? 

If a depositor's accounts at one FDIC-insured bank or savings association total more than $250,000, FDIC insurance does not cover the portion over that amount. In the event of a bank failure, the depositor may lose funds that exceed the FDIC insurance limit.

How Can I Evaluate The Health Of A Bank?

Evaluating a bank's health involves assessing various financial indicators and understanding the overall banking environment. Here are some steps you can take:

1. Review Financial Statements: Banks' financial statements are public documents that provide information about their financial health. Look at key metrics like return on assets (ROA), return on equity (ROE), non-performing loan ratios, and capital adequacy ratios.
2. Check the Bank's Credit Ratings: Credit rating agencies such as Moody's, Standard & Poor's, and Fitch Ratings provide ratings that reflect their assessment of the bank's ability to repay its debts. A high credit rating is usually a good sign.
3. Look at the Bank's Tier 1 Capital Ratio: This ratio indicates how much of the bank's core capital is available to cover unexpected losses. The higher the percentage, the better the bank prepares to handle economic downturns.
4. Examine the Efficiency Ratio: This ratio reflects the bank's overhead as a percentage of its revenue. Lower ratios typically indicate an efficient bank.
5. Check FDIC's Bank Data & Statistics: You can use FDIC's online database to find out if a bank is FDIC-insured and obtain a wealth of other information about its financial health.
6. Consider the Economic Environment: A bank's health often reflects the state of the economy. In a booming economy, banks generally perform well. In a recession, however, even a well-run bank may struggle.

These are just indicators and should be part of a broader analysis. Each measure has limitations and may not provide a complete picture of a bank's financial health.

How Can Individuals Mitigate This Risk? 

There are several strategies to ensure your deposits stay within the FDIC coverage limits:

Spread Money Across Different Account Ownership Categories

The FDIC provides separate coverage for deposits held in different account ownership categories, such as:

• Single
• Joint
• Revocable trust accounts

Depositors may qualify for over $250,000 in coverage at one insured bank if they own deposit accounts in different ownership categories.

Open Accounts With Multiple FDIC-Insured Banks

You can increase your coverage by opening accounts at more than one FDIC-insured bank. Each separate bank has its own $250,000 insurance limit.

How Can Real Estate Investors Hedge Against Future Bank Failures?

Real estate investors can hedge against future bank failures by diversifying their investment portfolios. Here are some strategies:

1. Invest in Real Estate Investment Trusts (REITs): REITs allow individuals to invest in large-scale, income-producing real estate. They provide a way to access real estate markets without buying or managing property directly. REITs are traded on major stock exchanges, offering liquidity, which real estate itself does not. 
2. Bonds and Treasury Inflation-Protected Securities (TIPS): Bonds, especially U.S. government bonds, are considered safe investments during economic downturns. TIPS mainly protects against inflation, which can often follow bank failures. 
3. Keep Cash Reserves: Keeping a portion of capital in cash or cash equivalents provides flexibility in an economic downturn and allows investors to take advantage of opportunities during such periods.

All investments carry risk, and it's essential to research and seek advice from a financial advisor before making investment decisions.

Key Takeaways

Banks can fail at any time. As a result, the FDIC insurance covers up to $250,000 per depositor, per insured bank, for each account ownership category, but amounts exceeding the FDIC insurance limit are not insured.

Individuals should spread money across different account ownership categories, open accounts with multiple FDIC-insured banks, or use the CDARS program.

Real estate investors can hedge against future bank failures through diversification, including investing in REITs, stable foreign currencies, bonds and TIPS, non-correlated asset classes, and keeping cash reserves.

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