‘The bank is the safest place to keep your money’ is an old cliché, but it rates just a ‘click’ above the mattress for some - or below, as it may be. However, the mattress never paid you anything for the privilege, so the bank seemed like the better deal. Still, this past quarter, some cold water was thrown on the idea that the bank really is the safest place to keep money. Do not be alarmed - it is very ‘safe’ in some ways, like from a petty robber or fire. However, as it turns out, your cash is not protected from the vagaries of the financial system, which, could potentially cause havoc if misunderstood or overlooked. The recent failures of Silicon Valley Bank and a New York counterpart, Signature Bank, almost did cause havoc, however, the Federal Reserve (‘The Fed’) came to the rescue and guaranteed all deposits to their full amount (despite the prior $250K limit) in both banks saving much heartache and possibly, disaster, for many companies.
But why is deposit ‘insurance’ necessary at all, especially if the bank is ‘safe’? A likely potential reason is leverage. Banks are among the most highly leveraged companies in the world. Simply put, when you deposit money into your bank account, the bank then borrows a much larger sum against it, from the Fed, and then invests all the money into various types of loans. A loan could be owning a U.S. Treasury bond, a mortgage (backed security), or making a loan to a small business. The Fed determines what banks can and can’t own with your money and theirs, but there is leeway in how each bank invests. In some cases, banks invest unsuccessfully, which, unfortunately, can result in failure. A few too many bad loans combined with an interest-rate move that devalues the ‘safe’ stuff on the bank’s balance sheet and suddenly the bank is in deep water. Your money could be at potentially be at risk too if your account is worth more than $250,000 because of the FDIC insurance deposit limit.
If this has got you down, fear not. There are still options that are generally considered lower risk to hold your savings. Money market funds are a starting point. Money Markets funds typically own loans and bonds in a similar style as the bank, but they operate differently, and pass the income through to their shareholders (minus fees).
The United States Treasury also offers investments that are typically viewed as lower risk including: treasury bills, bonds, and notes. These options are effectively lending money to the US Government (think national debt), and the US is mostly considered the gold standard of creditors, which, should give investors some measure of comfort.
A word on Schwab accounts for clients. Recently, the company, Charles Schwab & Co., has been in the news relating to the recent banking maelstrom. As a reminder, Schwab Bank does not use or borrow against the assets in your Schwab brokerage account, however some cash does ‘sweep’ to the bank side. Brokerage accounts are more akin to safe-deposit boxes than a bank account in some ways. Brokerages hold securities on your behalf and the assets in your account are segregated away from Schwab’s ‘general/operating’ account. Under federal rules and regulations, commingling of these funds is prohibited, and we like it that way! If you have any questions, contact us to discuss whether you are doing the ‘right’ thing with your excess cash or any other financial question. Best wishes for a Happy Easter and Passover.
Scott Lasky, CFP™
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All statements are opinions and should not be construed as facts. This newsletter is for informational purposes only and should not be deemed as a solicitation to invest, or increase investments in Lionshead Wealth Management products or affiliated products. Information provided is for educational purposes. Your advisor does not provide tax, legal, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions. Further, your advisor makes no warranties with regard to such information or a result obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.S&P 500® Index: is an unmanaged index of 500 common stocks primarily traded on the New York Stock Exchange, weighted by market capitalization. Index performance includes the reinvestment of dividends and capital gains.