With the recent failure of two banks in the US and one in Switzerland, the trust in the global banking system is in flux. Silicon Valley Bank customers could have lost $150 billion in unprotected deposits had the Treasury Department/FDIC not overridden the deposit insurance limits.
There are several moves you can make to protect yourself and your business. The rules and options for individuals are different than those for companies. We will outline the differences and describe both strategies.
First are business protections through the FDIC and the well-publicized $250,000 deposit insurance. The FDIC coverage is based on the EIN (Employer Identification Number) owner for each account. A business with multiple accounts in the same bank, with the same EIN on each account, is only covered for $250,000 in total. If accounts are spread between multiple banks, the $250,000 insurance applies to accounts in each bank. Banks offer deposit spreading services so you can deal with one bank and not several. Using this service allows companies to have up to $150 million in protected deposit balances. Banks don’t publicize this service as they want to hang on to deposits. Ask your banker about this service.
We advise clients to invest excess funds in money market accounts and US Government, short-term treasuries. Why leave cash under-earning for your business? For most businesses, holding cash to cover six weeks of payroll and 30 days of other working capital should be sufficient. Your deposits are then backed by a 30, 60, and 90-day maturities of treasuries, which gives protection and better earnings than money market accounts. Those securities are guaranteed by the US government, so deposit insurance is not needed, and the short-term maturity dates minimize interest rate risk.
For individuals, it is totally different set of rules. The same $250,000 limit applies but is modified for joint accounts. The deposit insurance is by person, so a joint account held by two people gets $500,000 in insurance. A couple could have two individual accounts and a joint account giving them $1 million in deposit insurance, all at the same bank. If they open accounts for each child or set up trust accounts for other beneficiaries there can be much more insurance. There is not a limit to the number of accounts.
For both companies and individuals with brokerage accounts, there is insurance coverage by the SIPC up to $500,000 per account, including $250,000 in cash. The insurance will replace missing securities rather than provide cash for them so your investments are not liquidated.
There is one glitch in the deposit insurance system that cannot be avoided: the FDIC has to do an accounting of failed bank assets and liabilities before they will cover your deposits. This could take up to a week and your cash could be frozen, so having funds in more than one bank is still advised.
C Squared Solutions provides interim or fractional CFOs, COOs, and CEO advisors in nearly all industries. We analyze and advise on these issues frequently through sophisticated modeling and experienced management. Give us a call or visit our website for more information and details. We have been there and done that!