Lessons From the 2023 Banking Crisis

I recently had an opportunity to discuss the recent bank closures and how in times of financial crisis, financial advisors have a singularly important role to play. As the dust continues to settle, many people are coming to terms with the realization that – despite the euphemism's connotations – "money in the bank" is only secure up to a certain amount. And those with cash holdings above the FDIC threshold ($250k for individuals and $500k for assets held in joint accounts) are wondering what they can do to protect the rest. Fortunately, there are some learnings they can take from what we all just experienced. 

Lesson 1: Stress-Test Your Assets 

Stress tests aren't just for multinational financial institutions anymore. Especially in dynamic market environments, any assumptions we might normally make about the relative safety and return of an investment should be continuously evaluated and re-evaluated. Cash is no exception: When you think about the money you've deposited in a savings account with a commercial bank, you'd do well to remember that it's essentially a loan. As we've just been reminded, given certain circumstances, even a bank can default on a loan. 

If you have a financial advisor, they should be running the "what-if" scenarios for you and advising you if certain investment holdings are too concentrated or somehow at risk in the current environment. You can also run your own scenarios in relation to your financial plans and how those might be impacted if certain holdings were suddenly depleted or taken off the table entirely. 

Lesson 2: Diversify, Diversify, Diversify 

Many investors are familiar with portfolio diversification and understand how a broad and varied equity and fixed income asset allocation can help smooth out what is often a bumpy investing journey through periods of cyclical and unpredictable volatility. But diversification isn't a strategy reserved for stocks and bonds: If you have a lot of cash, diversifying among multiple banks can help limit your losses should any one bank fail.

If you're a basketball fan, you may have read about the financial zone defense employed by Milwaukee Bucks star Giannis Antetokounmpo, who stashed his cash holdings with multiple banks to maximize FDIC protection (the limits apply to your holdings with a single institution, and there is no limit on how many different banks you can use). 

Milwaukee-based Baird employs a similar strategy for our clients' cash holdings. Our Cash Sweep Program automatically directs the cash allocation of your investment mix to up to five separate lending institutions. Doing so builds in the benefits of diversification and increases your FDIC protection from $250,000 to up to $1,250,000 ($2,500,000 for couples). Better still, because this is done automatically, our clients can receive this increased protection without having to open five different bank accounts themselves – plus they get a return on their cash investment many times greater than what a savings account at a bank is currently generating. 

Lesson 3: Good Financial Advice Is Worth Having 

The banking crisis also showed that even very successful people aren't always aware of how their assets are protected – and the limits of those protections – should the unanticipated happen. But for a financial advisor with a fiduciary responsibility to act in your best interests, such considerations have to be on their radar. A financial advisor can also evaluate the appropriateness of your cash holdings relative to other assets given current market conditions and can even recommend alternate ways to invest those holdings so they are working their hardest toward your financial goals. 

The counsel of a trusted financial advisor shouldn't be taken lightly. Silicon Valley Bank and Signature Bank were two of the largest banks to fail since the FDIC started keeping track in 1934 – and when they fell, they fell quickly, within two days of each other. When financial calamities happen, they tend to happen fast, giving investors and consumers little time to think, not to mention act, in a thoughtful, purposeful way. Having a trusted partner who understands "the rules of the road" and is invested in your success can prove invaluable.