I was planning to write about a different financial topic this month, but the collapse of a major U.S. bank has brought on some questions from clients. I’d like to talk a little about what happened in the banking world recently and its implications on your own bank account.

Last week a large bank (16th largest in the United States) called Silicon Valley Bank (SVB) collapsed. What this means is the bank was not able to come up with the amount of money its customers were demanding to withdraw. As a result, the bank went into receivership by the FDIC, which insures bank deposits up to a certain amount.

So why was SVB unable to meet its customer withdrawal demands? As we learn from the classic film It’s a Wonderful Life, just because the bank may have millions of dollars in customer deposits doesn’t mean they keep all the cash on hand. The funds are directed elsewhere, typically through loans and investments, to earn interest for the bank. In the immortal words of George Bailey:

You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can.

This is exactly what my bank, your bank, and SVB does, and it’s a good idea. The problem with SVB came in two ways. First, they decided to invest in relatively risky investments (long-term bonds), and second, their primary customers were startup companies which are more susceptible to financial harm when interest rates rise.

And rise they did. The government raising interest rates rapidly in 2022 was a double-whammy to SVB. Their risky, long-term bond investments lost significant value (as interest rates rise, current long-term bond values go down), and their startup business customers needed cash to run their businesses and couldn’t borrow it at the new, much higher interest rates. As these customers withdrew cash to pay their bills, SVB was forced to sell their investments at huge losses, which further escalated the fear.

What does this mean for you and your bank? Any cash you have in a bank account under $250,000 is 100% insured by the FDIC. If your bank failed, you would get that money back. This includes money held in a checking account, savings account, money market, or CD.

What if you have over $250,000 at your bank? The amount over $250,000 is uninsured. The easiest way to resolve this is to move any amount over $250,000 to another banking institution. If you have $300,000 only in your name, you could keep the money at your current bank, but move it into an account in your spouse’s name.

Example: Jan has $300,000 in her checking account at ABC Bank, therefore Jan currently has $50,000 that is uninsured. If Jan’s husband Michael has $100,000 at ABC Bank in an account in his name, Jan could move $50,000 to Michael’s bank account, insuring the entire amount.

An alternative is for Jan to move $50,000 from her checking account at ABC Bank to a new account at XYZ Bank. The account type can be the same, as long as both accounts are at or below the $250,000 FDIC limit.

In my experience, most people don’t have this much cash in a bank account. 90% of folks are well under the FDIC insurance limits and shouldn’t worry too much. If you’re the exception, consider moving your funds into a different account not in your name, or to another banking institution to keep your cash FDIC insured.