So, the question on a lot of people’s minds is this: could your money vanish from your bank account overnight?
Well, it could happen. And it just happened.
The collapse of Silicon Valley Bank (SVB) and two other banks last week has the financial markets in turmoil. Rightfully so, there are lots of nervous depositors.
Did you know that these bank failures have been the second largest in US history? Well, the world is noticing and continues to react this week. Ordinary Bob and Jane investors like you and me need to seriously think about asset protection and risk mitigation strategies. Let’s discuss them in this post.
So, most of us have sensed for a while now (going back to 2008) that our financial institutions lack full transparency. Remember the collapse of Lehman Brothers? Yet instead you’re the one who’s made to feel like a criminal when you try to withdraw more than a couple thousand dollars.
What I mean is this: you’re asked why you’re withdrawing your money. And for what purpose. And then the teller records your response. Well, excuse me – “it’s my money, and it should really be none of your business”. This has been my irritated response. Without a doubt, it probably bugs you too. So, why are banks doing this exactly?
Well, the minute you deposit your money with any bank, it gets treated as a loan made to them. Here’s a fact: the bank has legal title to the funds deposited and they can be mixed in with the bank’s other assets. Yes, all banks do this. As part of what’s known as the fractional reserve system, banks only hold about 10% of their deposits in reserves. And this is why there’s usually very limited amounts of cash on hand at the branch level, typically barely enough for withdrawals and transfers. In fact, that percentage is probably generous (with the legal requirement removed by the Federal Reserve in 2020). Essentially, banks simply don’t have enough cash on hand to match in-person withdrawals on a large scale.
So, you can just imagine the chaos that could ensue if everyone showed up at their banks and began demanding their physical dollars. In reality, aka nation-wide bank runs. Clearly, it could happen if the bank collapse contagion continues.
But wait a minute.
Our deposits are insured, correct?
Yes, the Federal Deposit Insurance Corporation (FDIC)and CDIC (for Canadians) are supposed to insure your deposits up to $250,000 (and $100,000 if your deposits are in a Canadian financial institution).
Sure, you would definitely be inconvenienced (to put it mildly) if you were unable to withdraw your money in a flash. For example, if there was a system outage, a privacy breach or a bank collapse leaving you with no ability to pay your bills.
But the authorities have told you that your funds are insured under this amount, meaning you should be able to access your money at some point.
And what about deposits more than the threshold?
And if there are multiple bank failures all within a certain timeframe, how do we even know these limits will be honored by the banking system, FDIC/CDIC and government at all?
Well, we just don’t know.
If your spidey-sense is telling you to protect your hard-earned money, pay attention to it.
Here are a few things you can do relatively quickly to side-step the bank shit-show that seems to be unfolding at a rapid pace now:
- Keep your money in more than one financial institution. Look at who the major depositors are with your banks, and check out their financials including liabilities. Pick larger banks as they will likely be covered by FDIC/CDIC, not regional ones. Consider putting some money in a credit union, which technically doesn’t offer you much more protection than a bank but it could be part of your diversification strategy. We all need to keep some money in the bank to cover our running expenses.
- Only keep in the bank what you need to pay your bills. Keep bare are minimum amounts and look to other places to park and even grow your assets (read on). Keep some cash at home for an emergency banking scenario. Some people recommend one to three months’ worth of running expenses; use your own best judgment.
- Consider opening a couple of bank accounts outside of your home country in different jurisdictions. Diversification of your cash is key so that whatever happens at home, you’re not financially locked out.
- Put your dollars in US Treasury bills, short-term debt securities that mature within a year. Give yourself some time to park your money and explore alternative investment options. The Fed (and Bank of Canada) could likely resume interest rate hikes this spring to “quell” inflation, so this might be a good strategy for some people.
- Invest in gold, silver and Bitcoin. Interesting how these bank collapses have had people running in droves to precious metals and Bitcoin.
So folks, buckle up and get ready for the ride!
All signs are telling us that the financial markets are going to be crazy and unpredictable this year.
Now is the perfect time to get financially grounded in gold and silver.
I also offer financial coaching sessions to help you explore strategies that work for you – and not the matrix. So, book a free discovery call at karensibal.com.