May 4, 2023

Regional banks and concerns over large cash balances not protected by the Federal Deposit Insurance Corporation (FDIC) have been dominating the financial headlines since Silicon Valley Bank (SVB), fell into FDIC receivership. SVB is the first FDIC-insured institution to fail since 2020 and the largest by assets since Washington Mutual failed in 2008. Stocks fell Thursday morning and have continued through day, dragged down by regional bank stocks amid growing concerns PacWest Bancorp (PACW) could be the next casualty

These recent events have shaken the stock market and caused many depositors to question their banking relationships and the safety of their cash/savings. Confidence is vitally important for financial institutions where TRUST is a key asset. That confidence will take some time to be restored. I will get straight to the point:

What if I have a balance over the FDIC Limits?

• If you have larger savings/checking account balances over the FDIC limits which are $250,000 per insured or $500,000 for joint accounts, we recommend that you find an alternative for the excess cash.
• Great news, with the higher interest rates there is no shortage of attractive options with higher yields– just give us a call and we can discuss your situation in detail.

How about my cash with LPL?

• The cash in your accounts with LPL (Insured Cash Accounts) enjoys FDIC protection up to $2,500,00 per individual and $5,000,000 for joint accounts, significantly higher than most banks. We accomplish this by using a consortium of larger banks that each provide FDIC insurance up to the limits. More banks – equals higher limits.
• In addition to the above limits, your LPL account balances are insured by Securities Investor Protection Corporation (SIPC) in the case of LPL insolvency up to the applicable stated limits. (SIPC protects against the loss of cash and securities, such as stocks and bonds, up to $500,000 per client)
• We are very diligent in monitoring our accounts to make sure they do not exceed the above limits. However, we do have access to additional vehicles that are afforded similar protection for excess funds.

Why are the Regional Banks under so much pressure?

• Corporations and individuals with account balances over the FDIC limits are moving their cash somewhere else – and very quickly in some cases. Especially since there is no lack of attractive and safe alternatives with higher yields.
• Regional banks are very dependent on cash deposits as lending collateral – this has caused significant hardship on their required capital.
• Bond losses due to the above-forced selling and higher interest rates coupled with mounting commercial real estate challenges are adding additional pressure.
• Therefore, these banks are facing earnings and cash flow issues.
• Regional banks should also expect new and heightened regulations, which could hurt future profits as well.

We believe most regional banks will survive, but they do face headwinds.

The government’s actions to backstop deposits and provide short-term funding to banks that need it will greatly reduce the odds of a systemic crisis. However, we may see a bit more market volatility than we would like to see in the short term, but this is not another 2008.

As always, if you have concerns over the safety of your cash, want to know if your savings are FDIC insured, or would like to discuss higher-yielding alternatives - just give us a call.