SVB Bank Failure, FDIC Insurance, and Bank Deposit Sweep Programs

The FDIC took control of Silicon Valley Bank (SVB) on Friday after customers yanked billions of dollars from the lender in a 24-hour period. The funds are FDIC insured and both the FDIC and the Fed are preparing a special vehicle to backstop deposits at banks that run into trouble.

As an investor, you may have heard of FDIC insurance. But do you know what it is, how it works, and what the limits are? What about a Bank Deposit Sweep Program? Let’s break it down.

What is FDIC insurance?

FDIC stands for Federal Deposit Insurance Corporation, which is an independent US government agency that provides insurance to depositors in case of bank failure. FDIC insurance covers deposits such as checking accounts, savings accounts, and certificates of deposit (CDs).

What are the limits of FDIC insurance?

FDIC insurance limits are set by law and currently stand at $250,000 per depositor, per insured bank, for each account ownership category. This means that if you have multiple accounts at the same bank, the total coverage for all accounts is $250,000. If you have accounts at different banks, you can be insured up to $250,000 per bank. Some banks even offer additional insurance above FDIC limits (check with your bank).

Does FDIC insurance apply to cash in a brokerage/investment account?

Cash in a brokerage/investment account is not covered by FDIC insurance, even if the account is held at an FDIC-insured bank. Instead, cash in a brokerage/investment account is protected by SIPC insurance, which is provided by the Securities Investor Protection Corporation. SIPC insurance protects up to $500,000 per account, including up to $250,000 in cash. Note that SIPC insurance does not cover losses due to market fluctuations or other investment risks.

Understanding FDIC insurance and its limits is important for managing your finances and protecting your assets. Remember to check your account balances and coverage limits regularly to ensure that you're fully protected.

What is a Bank Deposit Sweep Program?

The majority of the core accounts used by Clarity Wealth are allocated to an account referred to as the Bank Deposit Sweep Program – BDSP (Symbol: “QPRMQ”) which is FDIC insured. This is the safest and most secure position to place unallocated cash. The true benefit of the QPRMQ product design is that Fidelity partners with numerous banks allowing cash to be allocated across the multiple banks in the program providing FDIC protection above the standard $250,000. Currently, the FDIC protection is approximately $2M. Please note that this number is subject to change based on the number of banks and the level of participation they have in the program.

BELOW IS SNAPSHOT OF HOW QPRMQ WORKS:

Suppose you deposit $600,000 in cash into your brokerage account. After the nightly brokerage sweep process, assets are deposited into three Program Banks the following business day.

 

 

 

 

 

While it is not prudent to speculate on the recent events, I can reassure you that Silicon Valley Bank and Signature Bank were not participants in the Bank Deposit Sweep Program. In the event they were, the monies allocated to the bank would have been below the FDIC limit of $250,000.

We take customer obligations very seriously. Not only in the investment allocations made for future growth, but also in those we expect to be secure. As is presented to us often in our role as a Financial Advisor, we are closely monitoring the financial events happening around us and will continue to communicate with you when changes are appropriate.