The Silicon Valley Bank (SVB) failure is a big deal. Big enough that I am going to tackle it over three days.
Today, I’ll talk about your cash and how it is protected. Tomorrow, I’ll talk about what SVB’s failure could mean for the economy and why this failure differs from the 2008 financial crisis so far. And, on Wednesday, I’ll break down what happened at SVB that caused it to fail so abruptly.
Most people know that the FDIC insures bank balances up to $250,000 in order to maintain stability and public confidence in the nation’s financial system.
Since many of you have more than one bank account, you can make sure that you’re insured using a handy calculator on the FDIC’s website, which you can find by clicking here.
Importantly, brokerage accounts aren’t FDIC insured, and brokerages always carry the following disclosures: Not FDIC insured, Are Not Bank Guaranteed, and May Lose Value.
But just as importantly, most large brokerages, including our primary custodian, Charles Schwab, have an affiliated bank (or series of affiliated banks) and the cash in your brokerage account is swept into a bank deposit.
That’s good, because it means that your cash is covered by the FDIC for the first $250,000 and the rules outlined on the FDIC website apply.
When cash balances exceed the FDIC limit, we take additional steps to protect your assets. For the most part, that means buying money market funds that invest in Treasury securities.
Importantly, the money market funds themselves aren’t insured – they aren’t bank deposits. The phrase money market is shorthand for money market mutual fund. Money markets are mutual funds.
Even though the money markets aren’t insured, the government money market funds only invest in government-backed securities, which have the same credit quality as the FDIC since the FDIC is backed by the government.
Sometimes we buy Treasury bills directly and sometimes we buy ETFs that buy Treasury bills, and they all have the same effect: government backing.
Sometimes we buy money market funds that don’t exclusively buy government backed securities. They typically invest most of the money in government bonds, but they also buy other types of assets that don’t have government backing, like commercial paper, that have credit risk.
Sometimes clients request the higher yielding money market funds that contain credit risk, and different advisors have different views on the risk/reward trade off regarding non-government-backed money market funds, and that’s okay since everyone has a different risk tolerance.
Although I am not personally worried about Schwab or any of their bank affiliates, it’s also prudent to take all of the measures described above (even after the Fed announcement last night about backstopping the two banks uninsured depositors).
Precautions like this are what we do with our own cash, and Acropolis’ cash. It’s a perfect example of how we eat our own cooking.