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September 12, 2023

How High Net-Worth Individuals Can Safeguard Deposits Amid Banking Uncertainty with a Cash Diversification Strategy

Moody’s, the global risk assessment firm, has recently announced their decision to cut the credit rating of several banks, mostly in the small to midsize category, based on numerous considerations including commercial real estate exposure and the possibility of continued rate hikes. This news arrives months after the dramatic collapse of several high-profile banks, leading to increased concern from high-wealth individuals about the safety of their bank deposits. So, what are high net-worth individuals to do? Developing diversification strategies for holding onto liquid wealth via bank deposits may help keep those funds intact and protected by the Federal Deposit Insurance Corporation (FDIC). Below we discuss how to navigate around FDIC insurance limits by spreading your wealth between accounts, keeping it insured and ready for future use.

Key Takeaways:

  • Several small to midsize banks have had their credit rating downgraded by Moody’s while five large banks are currently under a credit rating review
  • Ensuring FDIC insurance coverage has become more vital for high-wealth individuals amid rising interest rates and bank credit rating downgrades
  • Consider depositing funds in multiple banks and accounts to receive FDIC coverage
  • Diversify your bank accounts by investing money into a variety of savings accounts, such as a high-yield savings account, money market accounts (MMA) or a Certificates of Deposit (CDs) account
  • Use tools and resources offered by the FDIC to locate FDIC-insured banks and branches to guarantee coverage

What Caused this Decision from Moody’s?

Despite current profit increases and financial metrics that generally range from solid to outstanding, regulators are looking ahead to potential concerns, including:

  • The potential of continued interest rate hikes from the Federal Reserve and the lasting impact of the current high interest rate, which will likely remain high for a considerable period of time
  • Commercial real estate exposure
  • Diminished value of fixed-rate investments due to rising interest rates
  • Increase in bank funding costs

“Risks may be more pronounced if the U.S. enters a recession – which we expect will happen in early 2024 – because asset quality will worsen and increase the potential for capital erosion,” the agency said. “We continue to expect a mild recession in early 2024, and given the funding strains on the U.S. banking sector, there will likely be a tightening of credit conditions and rising loan losses for U.S. banks.”

Which Banks Have Been Downgraded by Moody’s?  

Several midsize banks have already been downgraded by Moody’s and the ratings agency has also listed several larger banks that have been placed under review for potential downgrades, although their credit rating has remained the same. Downgraded banks include Old National Bancorp, Fulton, M&T Bank Corp, Pinnacle Financial Partners, BOK Financial and Webster. Moody’s has also placed five banking giants under review for potential downgrades: Bank of New York Mellon, US Bancorp, Truist Financial, State Street Corp and Northern Trust Corp.

What Can High-Wealth Depositors Do to Protect Their Funds?

At this time, considering current interest rate levels and the potential for further hikes, developing a diversification strategy is critical for keeping funds insured and growing at a modest rate. Here’s how:

  • Consider multiple banks.  If the funds you currently have deposited into your bank exceed the FDIC insurance limit, consider moving portions of those funds to other banks. Maintaining multiple bank accounts across several different banks up to the $250,000 FDIC limit can keep your funds protected and fully guaranteed. This is a sound strategy regardless of whether the banking industry is experiencing challenges or not.
  • Look into an account with a credit union. If you live in a community with only a few banks, don’t forget that credit unions are an option. These institutions have insurance through the National Credit Union Association, which works the same as FDIC insurance and also covers up to $250,000 per insured credit union, per member-owner, per account ownership category.
  • Diversify across different savings accounts. Depositing your funds across different types of savings accounts can also be a solution. High-yield savings accounts, Money Market Accounts and Certificates of Deposit are all valuable tools you can use in your diversification efforts while keeping your multiple accounts centered at one bank or branch.
  • Deposit in CDARS/ICS at regional banks. One way to diversify deposits is to work with a single bank, typically a community or regional bank, to access Certificate Deposit Account Registry Service (CDARS) and Insured Cash Sweep (ICS). Both programs essentially allow you to buy whatever instrument you choose, such as 90-day CDs, which the bank will then move into a variety of banks. This ensures you’re covered under FDIC insurance at every bank while receiving a single report and having to maintain just one banking relationship rather than having to work with several individual banks.
  • Ladder investments with brokerage accounts. One way to stagger the maturity of your investments, or ladder them, is to invest money with a broker or wealth manager.
  • Get creative with account titling. It’s possible to open a variety of different account types – business, joint, personal, etc. – within the same bank. For instance, a married couple could open a joint checking, savings and Money Market Account. Then, as individuals, they could each then create personal accounts with the same features, potentially guaranteeing up to $750,000 in FDIC coverage.
  • Lean on the FDIC. Use resources like the FDIC’s BankFind Suite to find FDIC-insured banks in your area or in your region to ensure your deposits are fully covered and secure. The FDIC’s Electronic Deposit Insurance Estimator (EDIE) can be used to calculate the insurance coverage of all types of deposit accounts offered by an FDIC-insured bank.

Learn strategies for businesses to diversify amongst banking uncertainty.

Anders advisors have been monitoring the fallout from the collapse of SVB and its effect on high net-worth individuals and the banking industry. To learn more about diversifying assets and strategies to keep your wealth intact, and the associated fees, contact Anders below. 

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