De-Risking Your Bank Account
Last week the headlines were blasting: “Mark Cuban is moving to cash!” And data from the Investment Company Institute shows over $350 billion flowing out of mutual funds and ETFs since the end of February. Cash is once again becoming the “safe haven.” But the safety of cash depends on where you put it.
Good Bank, Broke Bank
Back in 2008, I had a good deal going with my bank. My checking and savings accounts were earning competitive interest rates, my paychecks were automatically deposited and a branch office was located across the street from my office. There wasn’t much else to think about. Then, in September of 2008, Washington Mutual collapsed. Within a few months, my accounts were transferred to another bank and that convenient branch office was converted into a carwash.
Washington Mutual was the 6th largest bank in the U.S. at the time with over $307 billion in assets. It set a new record for the largest bank ever to fail. The onset of the 2008 financial crisis created a bank run and 9% of its deposits were withdrawn in 9 days, which sealed its fate. Fortunately, no one lost their deposits as the Federal Deposit Insurance Corporation (FDIC) was appointed as receiver and transferred all of the assets and liabilities to JPMorgan Chase. While there have been many changes in bank regulations in the aftermath, a similar scenario could play out with a different result in the future.
FDIC to the Rescue?
The FDIC currently covers $250,000 per depositor (with a few nuances). This goes for both business and individual accounts. So, what happens if you or your business has $2 million in an account when the bank has a “Washington Mutual” moment? Unfortunately, the government gets to decide. In the worst case, only $250,000 is transferred to your new bank.
Since most people don’t want to take this kind of financial hit on their “safe” money, they try to work the system by opening a multitude of bank accounts to guarantee every dollar is insured. However, this greatly increases complexity and makes administration more difficult. It also isn’t the only solution available.
What Are My Cash Management Options?
Historically there have been several options available for managing large amounts of cash.
Open multiple bank accounts
As mentioned above, this has been the most common and the surest way to obtain 100% insurance on your savings and checking accounts. Unfortunately, this solution can become burdensome due to ongoing administration and “rate-shopping”.
Purchase a money market mutual fund
Historically, this has been considered one of the best non-bank options to store extra cash because the value of the fund is priced daily at $1. Government money market funds have recently been the go-to choice because they address potential default risks in underlying positions by only holding cash, government securities, and repurchase agreements that are collateralized with government securities. However, the yields on these funds after expenses are usually 0.05% or less today.
Purchase short-term Treasury mutual funds and ETFs
These funds have floating NAVs and low-interest rate risk as they may hold 30-day or 90-day Treasury bills (T-bills). Some take on credit risk by holding high-quality corporate bonds. However, this is not really “cash-like risk.” Today these funds yield less than 0.25% unless they hold some form of additional risk.
Purchase T-bills or certificates of deposit (CDs) directly
T-bills are backed by the US government, have little price movement, and are easy to buy or sell in large quantities. CDs are often sold by banks and require you to lock up your capital for a period of time. The bad news is that both require administration as they must be managed like a bond portfolio. Whenever a T-bill or CD matures, another one must be purchased to replace it.
Buy a safe
For most people, this is preferable to putting it under a mattress or burying money in the backyard. However, cash sitting in a safe will not earn any interest and will lose value over time as inflation decreases its purchasing power. There is also a much greater risk of loss through theft or natural disaster.
Clearly, none of these options are ideal as there are additional risks and/or administrative burdens.
Introduction to Bank Aggregation
To solve these problems, there is a relatively new offering available that should be considered. Seizing the opportunity to help high net worth individuals and businesses de-risk their banking relationships, several new companies have sprung up to serve in the role of bank aggregator. Essentially, you open one account with them, and then these companies open bank accounts at many different banks (sometimes hundreds) on your behalf and deposit a small portion of your money at each bank through a competitive bid process.
Because the $250,000 of FDIC coverage applies at the bank level, you can insure much larger deposits – up to $100 million in some cases.
The aggregator competitive bids the overnight cash to banks so you tend to get better rates without having to take credit or interest rate risk.
By using a single vendor, you get the benefit of bank diversification in one account, one statement, one 1099, one transparent online portal, and fast access to your funds - should you need a big chunk of cash quickly.
Interesting?
New technology is changing banking and cash management. Costs are being lowered and new solutions such as bank aggregation are available to make investors’ lives simpler and their cash more productive. There is no reason to take on additional administrative burdens. Maybe you can’t have your cake and eat it too, but you can have fully insured bank deposits, better interest rates, and less hassle!
If you would like more information on how to de-risk your bank account while earning a competitive interest rate, please contact Kings Path to discuss how we may serve you.
