What’s Going on With The Banks And What Do We Do Next?
What’s Going on With the Banks and What Do We Do Next?
The collapse of SVB Bank has sent shockwaves through the financial world, and the situation hasn’t gotten any easier as other banks quickly followed suit. The collapse of these banks can be mainly attributed to mismanagement, excessive risk-taking, and a lack of proper oversight. Regulators and authorities have stepped in to investigate the matter, and in some cases, the government has fully guaranteed deposits made by consumers to slow down withdrawals from the banking system and prevent further bank runs.
The good news is that the collapse of a single bank, even a large one like SVB, does not automatically lead to a banking crisis. We can look at data from the Federal Deposit Insurance Corporation (FDIC), which indicates that since 2000, over 500 banks have failed in the United States, with the majority occurring during the 2008 financial crisis. Despite these failures, the financial system has demonstrated a certain level of resilience and adaptability. This resilience is primarily due to the safety nets in place, such as the FDIC, which insures deposits at banks and savings associations. According to data from the World Bank, the global bank capital to assets ratio – a key indicator of bank stability – has been on an upward trend since 2010, reflecting stronger balance sheets and better risk management practices among banks.
With that said, rising interest rates are certainly taking their toll on banks, putting even more weight on the regional banking system. Investors are flocking to high-yield savings accounts and banks providing the highest returns for cash holdings without taking systematic risk into account.
If anything, the failures of these banks should encourage you to examine your cash and banking relationships to re-evaluate who holds your money and the benefits you receive for placing it there.
For those with bank accounts over the FDIC insurance limit of $250,000, it might be time to diversify your risk away from a single institution. This is where money markets come into play. Cash management brokerage accounts can provide automatic diversification while also seeking out products offering higher returns and greater safety over time.
We don’t believe these collapses will lead to contagion, but we see this as an opportunity to reassess cash management strategies and use them to positively impact your net worth for the first time since the Great Recession. Investors should take advantage of higher interest rates wherever possible while diversifying assets and looking toward money market accounts to build cash flow and optimize their portfolios.
Money market accounts inside of your brokerage have separate FDIC insurance limits, so you can have multiple money market accounts – all insured up to $250,000 – within the same brokerage. Diversifying cash between banks and money markets will help lower your risk in turbulent times.
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