With the failure of several large banks in this country, concern over the banking industry is merited. Since size doesn’t seem to be an issue, both small and large banks cannot be immune from the possibility of failure.
However, banks have never been safer. With state bank regulators working with the Federal Reserve, our whole banking industry is in safe hands. Plus, your funds are insured t the legal limit by FDIC.
Safeguards are in place to protect and ensure your funds are on deposit. The FDIC insures deposits up to a limit of $250,000 per depositor. The question in considering your bank and other banks is how do you know if it is safe? While no method is foolproof, there are indicators of trouble or potential trouble. A simple solution is to spread your deposits over several banks to take advantage of the FDIC insurance limits per bank. I want to be perfectly clear that these tips are only indicators and do not mean anything other than an overall indicator of issues.
The first indicator is the amount of risk (loans) the bank has to its available capital. Most banks have a minimum of 6% of reserves available for loan defaults. The more capital reserves a bank has may be an indicator of more financial strength. The higher the reserves, generally the better the financial strength of the bank. Banks often refer to this category as the Total risk-based capital ratio.
The second indicator is the loan-to-deposit ratio. The lower the ratio, the better indicator of the bank’s strength. Banks can over-loan, which would indicate possible problems. A reasonable ratio is 90% of deposits to loans.
A third indicator is the percentage of loans in default of 30 days or more. These loans would be considered non-performing loans and would have an effect on the reserves of the bank, as explained above in the risk capital ratio. Any percentage below 5% is a manageable number and will generally not affect a bank’s performance.
Even with FDIC insurance and other government agencies in place to assist and protect the consumer, it is important to know as much about your bank as possible. All banks will provide you with the needed information for you to make smart and correct decisions.
One thing to keep in mind is that SVB was not insolvent, it was illiquid. Although being illiquid can lead to being insolvent.
It had bonds it purchased at lower interest rates that would have had to be heavily discounted to sell and meet the liquidity demand. If held to maturity which was the intention for those bonds they would have been repaid at the par rate.
But what about Life Insurance Companies?
Could this happen to life insurance carriers that issue annuities? After all, didn’t they buy bonds at lower rates?
There is a big difference.
Insurance carriers bought bonds and if priced properly they sold annuities that should offer benefits related to the return on those bonds. Insurance carriers have the option to adjust those returns through the moving parts of an annuity. Selling an annuity is not the same as funding venture capital startups with high-risk loans. Same bond investment, but a very different risk profile.
Carriers have dollar-for-dollar reserves for the guaranteed policy values. Policy values are subject to surrender charges and MVA in many cases. The “depositor” on an annuity is disincentivized from making a “run” on the annuity company and the annuity company is not as illiquid as a bank because it holds the money and does not generally make loans with it (although there are some companies that have used a portion of their surplus to do loans).
There is a very low risk that an insurance company would have to sell discounted bonds for liquidity. They constantly have bonds reaching maturity which infuses liquidity that properly underwritten is more than enough to cover claims and withdrawals. Reinsurance also covers death claims during the earlier periods of the policy before the carrier has time to make its money back.
What if a Private Equity company that owns an annuity company goes under?
If regulators are doing their job, and there is no illegal mishandling of the money and reserves of an insurance company, there should be adequate funds to support the insurance company even if the parent company goes under.
An example of this was AIG. When AIG was at risk of going under the fixed insurance side of the business was not at risk of making its policyholders whole. They were separate entities.
There is nothing that is 100% safe, but FDIC deposit amounts and annuities are the 1st and 2nd place on the safety pendulum. Actually, 1st place might belong to a bank that loans out to high-risk private equity startups that have investors from Congress. Those investments are always too big to fail 🙂
I actually made a video several months ago about how insurance companies protect your money while also securing a profit for themselves. You can view that video by clicking here.
To learn how to use annuities in the most efficient way, check out my video series, “20% More Income in Retirement.”
Then feel free to reach out to me with any questions, or to have your custom ATLAS Annuity Strategy designed by clicking the “Schedule a Call” button in the top right corner of this screen.
All the best,
Marty