What to do with your money during a banking crisis

The banks went bankrupt. rich men became publicly restless, demanding protection. Regulators stepped in to try to stop the panic. The markets still faltered.

And now what, exactly, are we, the day-to-day actors of the economy, supposed to do?

This is not a rhetorical question. Too many people turn to immediate action in the face of what appears to be a threat. Change bank. Buy gold. Sell ​​everything (or something, at least).

If you’ve embraced inaction in this turbulent moment, however, you might be right. Ask yourself these questions: What has really changed in the world over the past week? And how have your own financial goals changed?

The answer to this second question is probably “not at all”. The answer to the first is: only a few things have changed, at least so far. But none of them inspire most people to rethink their goals — or take drastic action in pursuit of them in the days ahead.

All the money got scared

Some of the depositors who encouraged others to withdraw their money from Silicon Valley Bank were sophisticated venture capitalists. Signature Bank also had many corporate clients, particularly in industries like real estate, where experienced building owners are intimately familiar with economic cycles.

That didn’t stop depositors from running for the hills. “While we have a lot of love and desire for SVB, fear came first,” David Selinger, chief executive of security firm Deep Sentinel and longtime Silicon Valley Bank client, told Ma. colleague Maureen Farrell.

Rescuers came for the depositors

If venture capitalists and entrepreneurs who face risk to make a living could scare so easily, why shouldn’t the rest of us be scared?

Regulators anticipated this issue last weekend and decided to make depositors whole at the two failing banks — not just within the $250,000 limits the Federal Deposit Insurance Corporation normally covers, but for every last dollar.

There is no guarantee that they would do it again. On Thursday, Treasury Secretary Janet L. Yellen told the Senate Finance Committee that going forward, there would be no coverage for uninsured deposits unless leaving those customers to overdraft does not create unacceptable risks for the banking system. She specifically mentioned the possibility of any “serious risk of contagion.”

Even if you don’t keep a lot of money in your bank account, your exposure here may not be zero. Maybe your employer for years left over $250,000 in payroll in a single bank account without giving it much thought.

Hopefully employers have realized this risk by now. It’s worth asking them. It’s also possible that regulation – or at least the analysis by interested outsiders and rating agencies – will get tougher and cause many banks to be more cautious.

Not much new, but it’s new to you

If you have a two ahead of your age, you may not have many memories of 2008, when the banking system was brought to its knees. This financial crisis – and countless calamities before it – is a good reminder that our systems are resilient.

Bankers and businessmen make terrible decisions all the time. The markets are shaking. A bank with “Silicon Valley” in its name has never failed before, but there is absolutely nothing wrong with waves of economic uncertainty that last for weeks or more.

“You just realized at some point that this all seems to be shaking all the time,” said Tori Dunlap, 28, author of “Financial Feminist.”

Your goals probably haven’t changed

So the world around you makes no promises. But no matter your age, income, or assets, you probably have a list of financial goals.

Did something that happened last week cause you to change those goals? In the midst of the natural preoccupation with how to make sense of rapidly unfolding events, you may not have stopped to question yourself.

Chances are the answer is no. And if the answer is no, it’s fine to be a spectator for now.

You probably don’t need to run anywhere

For individuals, the best banking stress test is personal. Do you have over $250,000 in a single establishment? The vast majority of people don’t.

If you do, as Ms. Yellen acknowledged, the FDIC might not cover your theoretical losses. It is quite simple to solve this problem by opening accounts in other banks, so that you have coverage of $250,000 in each institution. (You might have more than that at a brokerage firm that stores your retirement savings. There are also broad protections, and you can learn more in the article I wrote this week with Tara Siegel Bernard, “Is My Money Safe?” )

When banks close, there is often panic and the kind of lines you saw in photos of Silicon Valley Bank branches last week. Yet what typically happens for depositors whose balances at a failing bank are below the FDIC cap is this: another entity steps in, and ATM deposits and withdrawals continue more or less normally.

Still worried? Create a backup checking account at another financial institution. Make sure the debit card remains active. Park some cash there if you have any to spare. Link it to any outside savings or brokerage accounts you have, so you can deposit money quickly if needed. And watch for monthly charges for inactivity or low balance.

You probably shouldn’t sprint from stocks either

As troubling as the financial world may seem right now, the overall U.S. stock market has risen this week. Sure, financial stocks have rebounded, but if you have most of your stock investments in vanilla index funds that hold thousands of different company stocks — and you should — your net worth may be higher than it is. wasn’t a week ago.

Even so, it’s natural to wonder if the prospect of more bank failures is the sell-out sign you’ve been waiting for. Wouldn’t you feel better if all your money was in cash and not in spins?

It could, a little. But consider these numbers that University of Michigan Ross School of Business professor Nejat Seyhun generated this week. Imagine holding a giant basket of just about every US stock and leaving it alone from 1975 to 2022. The return on that portfolio would have been 1,426%.

Now imagine that you sold everything here and there when things got uncertain. If you only missed the top 10 days of stock performance out of those 12,106 trading days, your return would drop to 602%. It’s a potential price to try to time the stock market, and those lost returns could mean having to work years longer than you want to.

The advice to stay put is cold consolation for recent retirees or wannabes who don’t want to face a stock market crash on the eve of quitting day. If that’s you, the good news is that many banks pay over 3% interest on savings accounts. You can park a few years’ worth of money there for basic expenses or somewhere equally safe if you’re feeling nervous. Having those savings would give any stock losses in the coming months some time to recover.

Living with the least worst system

If all of the above sounds like a slight rebuke to the already comfortable, I understand. Personal finance is way too complicated, and it’s not your fault. Once you get the hang of it, an unsatisfying conclusion looks like this: For most people, reaching a reasonable level of comfort requires ongoing risk.

So what can be most helpful in times like these and all the time, really, is to discuss the low hum of uncertainty, out loud, with someone you trust and which can make you feel a little better.

“This headline about the fall of the Dow Jones isn’t here to appease you,” Ms Dunlap said. “Find people who are there to give you facts without judgment, without the fear that makes it worse.”