Fears abound around the safety of personal finances following the collapse of Silicon Valley Bank, and while swift action is needed to restore confidence in the system, there are ways to protect your money.
Diversifying accounts can help mitigate risk
Monitoring a bank’s financial health is important
Emergency funds and investments in high-quality, liquid securities for protection
Many individuals have questioned the security of their assets after Silicon Valley Bank (SVB) collapsed. This growing unease has forced customers to seek more reliable alternatives. As a consequence, the banking industry is at risk of experiencing a detrimental domino effect, potentially triggering a significant downturn in the economy.
US Central Bank data showed that uninsured US bank deposits accounted for more than 40% of/ all deposits, exceeding $9.2 trillion in 2022. The deposits have no protection from losses in investments such as stocks, annuities and mutual funds.
The Federal Deposit Insurance Corporation (FDIC) protects deposits up to $25,000 per person, per bank account.
Economies across Asia-Pacific have not experienced a contagion effect of the banking crises in U.S. but nevertheless, this incident serves as a cautionary signal for countries that have not implemented aggressive interest rate hikes, unlike the People's Bank of China's steadfast stance of maintaining their prime loans unchanged.
Based on data from 2013 to May 2023, the average interest rate in China has remained relatively stable at 4.38%. During this period, the highest recorded rate was 5.77% in April 2014, while the lowest was 3.65% in August 2022, which persisted until May 2023.
There are several methods to safeguard hard-earned money and investments, with minimal time or effort, and customers should start by looking more closely at their bank beyond its name.
Diversifying accounts can help mitigate risk
Diversifying the banking portfolio among FDIC-insured banks may mitigate the risk associated with keeping all funds in one place.
When a person invests in a single asset or single sector, the portfolio is highly exposed to the risks associated with it. In the event of a banking collapse, the value of that asset may decrease, resulting in a significant loss in investment value.
By diversifying the portfolio across a range of assets and sectors, risk exposure is reduced. If one asset experienced a decline in value, the impact on the overall portfolio may be mitigated by the performance of other assets or sectors.;
Monitoring a bank’s financial health is important
FDIC assures depositors that their money is protected, however, the failure or collapse of a bank cannot be predicted with certainty.
In order to determine the bank’s financial strength, it is advisable to review the financials and industry-standardised health metrics that are submitted by US banks to the FDIC. Regulators conduct audits to ensure the accuracy of this information. The FDIC and Federal Reserve websites make this information publicly available.
Emergency funds and investments in high-quality, liquid securities can provide additional protection
Maintaining an emergency fund equivalent to at least three months of expenses is important, and should be replenished promptly if the fund falls below the safety threshold. Online high-yield savings accounts are an excellent option for this purpose, as they are FDIC-insured. Additionally, securities such as treasuries issued by the US government can be a safe choice since they are of high quality and are among the most liquid securities globally.