How to Protect Your Money If Big Bank Collapse? What Alternatives Exist?

How to Protect Your Money If Big Bank Collapse? What Alternatives Exist?

The collapse of Silicon Valley Bank and Signature Bank in early 2023 led many people to doubt the safety of their money in big banks. Although measures have been taken to strengthen the banking system since then, the possibility of another financial collapse cannot be ruled out completely. So, how can you protect your money if big banks collapse? Let’s dive in and explore some smart money tips and moves that you can make! 

2023 Banking Crisis: An Overview

In March, a major US bank, which was a significant lender to the tech industry, experienced a bank run, resulting in its failure, marking the biggest failure of a US bank since the global financial crisis. Customers of Silicon Valley Bank were withdrawing their funds in a panic, which led to US regulators taking control of the situation.  

The event caused the market panic, impacting weaker financial institutions already dealing with challenges related to high interest rates and their own issues. In the aftermath, Signature Bank was closed down, First Republic Bank was given support, and Credit Suisse, a bank of global financial importance, was saved from a major threat as it was acquired by UBS. 

Find out how Silicon Valley Bank’s collapse influenced forex trading and beyond! 

What just happened? 

Friday, March 10 SVB, the bank at the center of the biggest banking collapse in America since 2008’s Washington Mutual, was taken over by the Federal Deposit Insurance Corporation (FDIC). The bank’s downfall began 48 hours prior when it suffered multibillion-dollar losses after selling US government bonds to raise funds for depositors. In a failed attempt to stabilize its finances, the bank tried to sell shares which caused panic among investors and ultimately led to its collapse. 

Sunday, March 12 Signature Bank was closed by the FDIC due to a surge in customer withdrawals, caused by fears stemming from SVB’s collapse. Both banks had an atypically large proportion of deposits that were not insured, which they used to finance their operations. 

Wednesday, March 15 Swiss authorities stepped in to provide support for Credit Suisse (CS), the country’s second-largest bank, after its shares plummeted by up to 30%. This move helped alleviate the immediate market turmoil but concerns still persist among investors and customers regarding the bank’s ability to address its ongoing business decline. Despite the backstop, Credit Suisse, a global player, remains uncertain about its future prospects. 

Thursday, March 16 First Republic Bank was in a precarious situation due to customers withdrawing their deposits. To address this issue, US Treasury Secretary Janet Yellen and Jamie Dimon, the CEO of America’s largest bank, held a meeting in Washington where they developed a rescue plan involving the private sector. The outcome was an agreement with a consortium of American lenders to inject billions of dollars into First Republic Bank to stop the outflow of funds. 

Sunday, March 19 UBS, the largest bank in Switzerland, has entered into an emergency rescue agreement to acquire its struggling competitor Credit Suisse, with the aim of preventing financial market turmoil. 

The return to a state of relative calm was made possible by the infusion of substantial emergency funding from central banks, acting as lenders of last resort, and some of the most robust players in the industry. However, there is still unease in the markets, as evidenced by the fact that benchmark indexes for US and European bank shares have respectively declined by 20% and 13% since the close of trading last Wednesday. 

Here’s why Wall Street fears the banking crisis hasn’t ended! 

Despite reassurances from financial regulators and bankers, the banking industry continues to face uncertainty as bank failures and concerns about the health of remaining players cause investor worry. Bank shares on Wall Street have sold off, and there are fears that the failures of some banks may lead to financial contagion that could impact the wider economy. Although bankers and regulators have tried to calm investors, the sell-off has continued, and even relatively healthy banks are seeing their share prices fall.  

Silicon Valley Bank collapse

The Federal Reserve’s fight against inflation has played a role in the banking turmoil, with higher interest rates prompting depositors to move money into higher-paying certificates of deposit and money market funds. The collapse of three large banks in the past six weeks is likely to cause other banks to tighten lending, which would help the Federal Reserve in its inflation fight. 

What happens to my money if my bank collapses?  

To put it briefly, if you have an account with less than $250,000 in a US bank insured by the FDIC, you can feel secure knowing your funds are protected. Each account owner is covered up to $250,000, and for joint accounts, the coverage extends to $500,000. Similarly, deposits in federally insured credit unions in the US are protected up to $250,000 by the National Credit Union Administration.   

In Europe, depositors also have safeguards in place. In the UK, the Financial Services Compensation Scheme provides up to £85,000 ($102,484) in compensation, doubled for joint accounts. In the European Union, the Deposit Guarantee Scheme ensures that customers of failed banks are entitled to receive up to €100,000 ($105,431) in compensation, or €200,000 ($210,956) for joint accounts, which is funded by the banks themselves.  

 Is it a good idea to withdraw my money during a bank crisis?  

Jay Hatfield, CEO of Infrastructure Capital Advisors and portfolio manager of the InfraCap, advises against withdrawing all your money from a bank. He suggests ensuring that your bank is insured by the FDIC, as most large banks are. While Hatfield does not recommend panicking, he believes it is wise to have insured deposits rather than uninsured deposits.   

The recent bank collapse serves as a reminder to be mindful of where you keep your money. Bankrate analyst Matthew Goldberg stresses the importance of ensuring that your money is held in an FDIC-insured bank, within FDIC limits, and following the FDIC’s rules. The FDIC provides several resources on its site, including the “bank suite” tool, which lists FDIC-insured banking institutions, and the Electronic Deposit Insurance Estimator, which calculates the insurance coverage of various deposit accounts at banks.   

Hatfield’s advice is to divide your money among multiple banks, suggesting that if you have a large sum, you should have four accounts and have them insured. However, it is worth noting that you may already be insured for more than $250,000 at your current US bank if you have multiple deposit accounts or a joint account. 

How to Protect Your Money Following Bank Collapses? 

In times of financial instability, protecting your money becomes an even greater necessity. The following five inputs will assist you in safeguarding your finances and preparing for unexpected bank collapses. 

  1. Be careful not to panic – News of the collapse of the second and third largest banks in history may raise concerns about the safety of your own bank. However, it’s best to stay calm and avoid making impulsive financial decisions like withdrawing all your funds. In the opinion of Ryan McCarty, a certified financial planner at Castle Rock Investment Company, panic in the market could result in a bank run. 
  1. Make sure your bank’s prepared – To avoid the risk of losing your money to a failing bank, it’s important to monitor the bank’s financial health by conducting research and keeping track of any suspicious activities in your account. You can also sign up for notifications or alerts from your bank and regularly check your accounts. If you have concerns, contact your bank to discuss their plans to address the situation. 
  1. Your bank must be insured – Bank and credit union depositors are provided deposit insurance by the Federal Deposit Insurance Corporation and the National Credit Union Administration, respectively. In the event of a bank or credit union’s collapse, each depositor is protected for a maximum of $250,000. Ensure your funds are held at an institution that offers deposit insurance if your financial institution is not covered by FDIC or NCUA insurance. 
  1. Don’t leave the market – When banks fail and the stock market drops, it’s natural to worry. But don’t make hasty decisions that could lead to bigger losses in the long run. John Anderson, a Certified Financial Planner, recommends against reacting impulsively by pulling out of the market when faced with bad news. This knee-jerk response often leads to selling at low prices. Stick to your investment strategy and remain steadfast. 
  1. Keep Your Bank Balance Under the FDIC Limit – It’s important to diversify your risk by not keeping all your money in one bank. Deposits under $250,000 are protected by the FDIC, but those with more money or businesses need to keep a significant amount of cash on hand. Research financially stable banks and distribute your funds among them to ensure they are all insured. Alternatively, a bank can manage it for you. 

Given the recent unsettling occurrences, there is a considerable amount of uncertainty about the most prudent course of action to take. If you harbor apprehensions about the security of your funds or have any uncertainties concerning your financial position, it could prove advantageous to seek the counsel of a financial advisor. They possess the expertise to evaluate your alternatives and formulate a strategy to safeguard your finances. 

Should I consider Investing in other sectors in a Bank Crisis? 

During a bank crisis, diversifying investments and exploring other sectors is wise. Healthcare, consumer staples, utilities, and technology are some sectors that may perform well. Healthcare is more resilient during economic downturns, while consumer staples are stable due to daily need. Utilities provide essential services and have stable revenues. Technology has been rapidly growing and may benefit from increased demand during a crisis. 

Here’s an ultimate guide to ace your Investment Portfolio Diversification and succeed as an investor!

How to Protect Your Money If Big Bank Collapse? What Alternatives Exist?

What are some alternatives to protect money during a bank collapse? 

A bank failure or collapse is a rare occurrence, and almost every country has deposit insurance schemes that cover deposits up to a certain amount. However, you might consider these alternatives if you’re worried about losing your money during a bank collapse: 

  1. Diversify your deposits: Spread your deposits across multiple banks rather than depositing all your money in one account. The risk of losing your entire savings if one bank fails can be reduced if you have several banks. 
  1. Invest in precious metals: If you want to protect your wealth in uncertain economic times, you can buy gold and silver. With precious metals, you can hedge against inflation since they tend to hold their value over time.  
  1. Consider alternative investments: Real estate, stocks, and other alternative investments can help you diversify your portfolio and lessen your reliance on conventional banks.  
  1. Keep cash on hand: In case of an emergency, you should always have some cash on hand. Having cash on hand is a smart idea because you might only have limited access to your money in the event of a bank failure. 
  1. U.S. Treasury bonds: Since U.S. Treasury bonds are backed by the full faith and credit of the U.S. government, they are considered to be among the most secure investments. As a safe-haven asset, Treasury bonds may be sought by investors during a financial crisis. 
  1. Use a credit union: Credit unions are not-for-profit organizations that are owned by its members. Similar to banks, credit unions provide deposit insurance. However, credit unions tend to be more regionally focused and smaller than banks, which makes them less susceptible to economic downturns.  

You should be aware that these alternatives have their own risks. If you plan to make any significant changes to your investment strategy, speak with a financial advisor first. Here are some traditional Safe Haven Assets that are reliable during economic downturns! 

How are online banks different from traditional banks? 

Online banks and fintechs differ from traditional banks in terms of accessibility, lower costs due to the absence of physical branches, regulation through partnerships with regulated entities instead of having a bank charter, and innovation with the ability to quickly adopt new technologies and offer new products and services. 

A neobank company is an online or mobile platform that offers banking services or accounts, often without a bank charter from state or federal regulators. To ensure deposit insurance, neobanks often partner with a regulated entity like the FDIC. Online banks, on the other hand, are typically online divisions of brick-and-mortar banks and have the same insurance coverage as their parent bank. In comparison to traditional banks, using an online bank can provide lower costs, greater accessibility, and potentially better rewards. 

How safe are online banks? 

In short, digital banks are not more or less susceptible to failure than traditional banks. According to experts, as long as your deposits are insured by the federal government and do not exceed the maximum coverage limit, you can have peace of mind. However, it is advisable to conduct thorough research and scrutinize publicly available information for potential red flags that may indicate a bank’s financial stability. These indicators include solvency, which refers to a bank’s net worth, and liquidity, which is the ability to meet customer needs and cover withdrawal demands.  

Despite these precautions, there is no foolproof method to predict a bank failure. The good news is that you can safeguard your savings by ensuring that your deposits are federally insured and following the guidelines. “The most important thing to verify is that the online bank is FDIC-insured. As long as the institution is federally insured and savers keep within the guidelines, your money is safe even in the event of a bank collapse,” said Ben McLaughlin, president of SaveBetter, an online savings platform. 

How do I know which banks are safe from collapse?  

Bank stability is a concern for many people, and it’s essential you figure out how to evaluate it. US banks are insured up to $250,000 by the Federal Deposit Insurance Corp (FDIC). Therefore, if your bank is FDIC-insured, your money is safe. Furthermore, JPMorgan is on the list of “too big to fail” banks maintained by the Financial Stability Board.  

Keep in mind, however, that there’s no surefire way to predict a bank failure, and Silicon Valley Bank, Signature Bank, and First Republic Bank have all failed recently. To ensure your bank’s viability, make sure your bank is FDIC-insured and monitor its financial reports. Knowing your bank’s financial health will also help you make better decisions about your money and feel confident that your deposits are safe. 

What are the red flags that indicate your bank is in trouble? 

There are some things to watch out for if you are worried about your bank on the verge of closure: 

  1. Keep an eye on your account: Be on the lookout for unusual activity or unexpected fees. Immediately notify your bank if anything seems off.  
  1. Monitor the stock price: You can monitor your bank’s performance by watching its stock price. A significant drop in stock price may signal financial difficulties. 
  1. Review quarterly and annual reports: Banks are mandated to report their financial performance on a quarterly and annual basis. Reports like these can be used to determine financial difficulty. 
  1. Set up Google alerts: Set up a Google alert for your bank to be notified whenever new stories or updates are posted. Account developments can help you stay on top. 

It is crucial to closely monitor your bank’s behavior to ensure its stability. If the bank is attempting to raise funds through a share offering or by selling more stock, it may indicate difficulties on its balance sheet. It’s important to note that public companies, including banks, may sell shares or issue new ones for various reasons, so context is essential.  

For instance, First Republic raised capital through a share offering this year when the challenges it faced were widely known. However, this move resulted in an exodus of investors and depositors. 

Can smaller banks be a safer option in times of financial turmoil?  

In times of financial turmoil, smaller banks may be a safer option depending on the circumstances. Their focus and conservative approach may enhance their resilience to economic downturns, and their close relationships with customers may enable better risk management. However, due to a lack of resources and diversification, smaller banks may be more vulnerable to market fluctuations and more prone to failure than larger banks. 

Here’s an article you might find worthwhile: How to profit in a recession: Trading strategies to recession-proof yourself!

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