Our Banking System

The banking system in most developed countries is considered relatively safe and secure, thanks to various regulatory measures put in place to safeguard deposits and prevent financial crises.

For example, in the United States, the Federal Deposit Insurance Corporation (FDIC) insures bank deposits up to $250,000 per depositor, per insured bank. Credit Unions have a similar program with the same limits through the National Credit Union Administration (NCUA).

Additionally, the U.S. Federal Reserve oversees and regulates banks to ensure that they are operating within safe and stable parameters.  But risk requirements are most stringent for the largest banks, and some of the regional banks like Silicon Valley Bank were able to lobby Congress to be excepted from the most strict regulatory requirements.  In hindsight, this was a bad idea.  SVB did reportedly receive warning letters from regulators, but any adjustments to their risk practices were insufficient to satisfy depositors, and the bank was forced into receivership by the FDIC.  There is a good interview in the New Yorker on this topic which you can read here.  In short, regulators seem to have either been too slow to enforce any actions or did not have sufficient tools to force SVB to address their risks and consequently the FDIC had to step in.  This is hopefully addressed in the near future by regulators to prevent this from repeating in the future, but getting agreement in Congress is difficult, to say the least.

The FDIC

The FDIC provides stability and confidence in our banking system, but only insures deposits up to $250,000 per depositor.  Perhaps one takeaway from our current banking issues are that you should be aware of your bank balances and consider diversifying your bank exposure to stay under the limits.  For those of you with large bank balances, you could consider a brokerage account that allows for the purchase of Certificates of Deposits from different banks.  You can have the convenience of one account, but multiple bank deposits at different institutions which allows you to stay under the FDIC limits and receive competitive interest rates.  This is something we commonly do for our clients.

Charles Schwab is the custodian of our client accounts, and they also own and operate a bank.  Please see their response to recent events here.  You can also read a good Reuters article about Schwab here.

Overall, while no system is completely foolproof, the banking system in most developed countries is considered safe and stable due to the various regulatory measures in place.