Disintermediation: Regional banks to pay increased interest to keep depositors from moving funds to safer big banks



Treasury Secretary Janet Yellen sought to reassure markets and lawmakers on Thursday that the federal government is committed to protecting U.S. bank deposits following the failure of Silicon Valley Bank and Signature Bank over the weekend…

Republican Sen. James Lankford of Oklahoma pressed Yellen about how widely the uninsured deposit backstops will apply across the banking industry.

“Will the deposits in every community bank in Oklahoma, regardless of their size, be fully insured now?” asked Lankford. “Will they get the same treatment that SVB just got, or Signature Bank just got?”

Yellen acknowledged they would not. Uninsured deposits, she said, would only be covered in the event that a “failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences.”



While the statement is true, it is essentially meaningless. The second news gets out that some bank failed and depositors took a haircut, there will be a run on pretty much ALL banks. And that is the epitome of “systemic”, so if it ever happens, it’ll have to be nipped in the bud, and no depositor will ever take a haircut … so it can’t ever become a story and thus won’t become systemic.

All deposits are effectively insured now.


Regardless, the real question for the depositor is are you willing to take the risk that insurance will not come through. And if so why?

Easier to move most funds to safer big bank. Unless regional pays a premium like higher interest. Or Congress comes through with better insurance or regional bank safeguards.

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I learned this lesson from my grandparents: Never keep more than the FDIC insured limit at any bank. Split up your assets into as many banks as necessary. They personally witnessed the bank failures of the 1930s and passed on this knowledge.

I was glad I followed their advice. I bought CDs for high yields at several banks (including Countrywide) which failed in 2008. All below the FDIC insurance limit. I didn’t lose any money. So I don’t intend to move any of my money to a “safer” big bank (most yield lower interest) since they are all equally safe – if funds at the bank are under the FDIC insurance limit.

This could be a problem for much larger accounts (such a corporate accounts) but most individual investors shouldn’t be greatly inconvenienced.



They do say you can increase your FDIC coverage with multiple accounts. Joint account, individual accounts and joint accounts with family members, etc.

But of course lots of paperwork. So practical limit is maybe less than $2MM.

You can increase your FDIC limit a lot easier than all that! Simply put the money in a brokerage account and have them spread it out in CDs across as many banks as you like. If it’s a LOT of money, they usually do it in $200k chunks. Just 10 banks would cover $2M, 100 banks would cover $20M, etc. Not only that, but they can ladder it as well if you want a CD ladder.


Great option Mark.

I will also add that if you have questions about your FDIC coverage, there is a great calculator on their site that not only tells you your coverage, it can also be used to find ways to increase coverage by changing ownership/titling and benes. For example, you can easily get to $1,000,000+ in FDIC coverage with joint owners and benes.