I have been seeing conflicting opinions from people in the financial know-how. On one hand, patio11 says that you can ignore this and that the banking system is very resilient. On the other hand, him and others mentions that you need to use 3rd party providers in order to distribute your deposits in order to have full insurance coverage. Is there any way for a non sophisticated person to avoid these headaches? Otherwise why is this so different than the knowledge required to self custody crypto-assets?
If you are storing more than $250K (the standard insurance limit), then you need to distribute your deposits. It is as simple as opening accounts in N/250000 banks, although if you are close to an integer or expect the cash to increase substantially, you might want more than that.
So for individual people, this affects... maybe 5%. It certainly affects small companies, but those are entities that we, as a society, expect to have good financial advisors. (It turns out that many of them do not.)
Every bank and credit union I've ever dealt with has prominently placed the FDIC or NCUA insurance terms on their paperwork, website and physical doors. When you sign up for an account with a brokerage/bank, they are always explicit about what accounts, if any, are protected savings and which are unprotected investment accounts.
It's just not remotely practical to keep dozens of banks accounts with $250k in them for most companies. Many payrolls are larger than that, if you're renting a venue for an event, it'll be larger than that. Obviously well-staffed finance teams could shuffle funds endlessly, but there's just no economic value to creating treasury jobs for the sake of it. We'd be much better off just upping the FDIC limit to something like $5M and mandating better quality assets for the insured portion of bank deposits.
recently had a call with Fidelity about this. many places including Fidelity will automatically split your cash between many banks on the bank end. for Fidelity the money in my Cash Management account will be split into up to 20 different banks which means that up to $5 million is FDIC insured. https://www.fidelity.com/why-fidelity/safeguarding-your-acco...
The idea is that if you're keeping 250k+ in cash sitting around you should probably be in-the-know. Deposit sweep accounts are incredibly easy to use, Fidelity lets you open one in ~5 minutes. Further, this isn't just some hack, as distributing funds around many banks makes each individual bank less brittle.
The letters "CFO" are pronounced "those in the know".
Doing a cash sweep is NOT rocket science and there are lots of services that can do it for you.
A company can also project forward and ladder treasury instruments to mature at the right times to provide liquidity. T-{notes,bills,bonds} are issued by the US government and thus have at least as much resiliency as the SDIC.
I think that advice was meant for different audiences. If you're a W2 employee who has modest savings, you're in the class of people who can safely choose not to add/remove/change any of your banking relationships. You are who the FDIC was designed to protect. If you're feeling like you must "do something" then open another checking account somewhere and keep a month's expenses there. That redundancy is probably worthwhile in good times and bad.
If you're an owner and you need over 250k to be liquid on daily to weekly timescales, but hiring a three people to manage manage your bank accounts sounds unaffordable, you should find a 3rd party that can do that "cash sweep" thing for you.
If you are over $250K limit and need that money under 2-3 years then T-bills is the way to go. I haven't used it as I'm not a US resident but I hear that it's straightforward.
Beyond 3 years it makes sense to spread it among Index fund, gold ETF etc., depending on your need, risk appetite etc., But then we are venturing into "investment" and not "safe keeping".
> Is there any way for a non sophisticated person to avoid these headaches?
On your own account, once you reach $250k in cash (not pensions or home equity etc) you're basically in the financial 1% and you're sort of expected to be either sophisticated or speak to a "wealth management" firm.
As a business it's more complicated in the intermediate zone before you can hire a Treasury Officer to deal with this, which is basically patio11's argument.
Pretty much nobody has enough cash held in a bank account for this to be a concern. People were worried about SVB because it was so overrepresented with accounts of more than the insured limit because it was used by cash-rich technology companies. A normal person, even if they’re rich, probably has most of their net worth in assets (real estate, investments) and is not holding cash.
Just don’t exceed the insured amount in a single bank, and if you do need to have more than $250k in cash… either open a second account at a different bank or donate it.
Banks are slow moving institutions. I think most have not yet come to grips with the idea of a bunch of 20-somethings getting handed millions of $ for a nice plan but with $0 revenue. OTOH, SVB was supposed to be specialized in such cases.
Apologies in advance if I'm missing some context here but from my understanding it's pretty straight-forward: in the U.S. an individual is insured by the FDIC up to $250K. So anything you have over that in the one account is "susceptible" to bank failure losses (and even then it's not guaranteed that you'd lose your $...just possible).
So if you have $1M parked in one account then you're at risk. $250K parked in 4 accounts caries zero risk.
If you have more than $250,000 in cash, keeping it in checking accounts is just dumb. Open a TreasuryDirect account and start buying T-bills... they're paying 5% right now, way more than a checking account.
