Note: An earlier version of the story misstated the reason for Silicon Valley Bank's failure.
The failure of Silicon Valley Bank is prompting all investors to ask themselves the question: Is my money safe? And if you don't know, now's the time to look.
It's up to investors, including those who own ETFs, to look up their accounts and check if they are protected against the risk of failure of their bank or brokerage. Typically account insurance comes in two forms best known by their acronyms: FDIC and SIPC. It's easy to check your accounts and make sure you're covered. And now's the time to look if you haven't already.
Online searches for "FDIC" more than quadrupled on March 10, the day Silicon Valley Bank collapsed. The bank's mismatch of assets and liabilities lead to the run. Much of its capital was tied up in long-term government securities. Meanwhile, it relied on non-FDIC insured deposits. Even a whiff of trouble prompted many depositors to pull money out, leading to the trouble.
Is Your Money Safe? Checking Your FDIC Coverage
If your money is in a bank savings or certificate of deposit account, FDIC insurance is what you need. FDIC stands for Federal Deposit Insurance Corporation. The FDIC is a U.S. government sponsored corporation that safeguards deposits at commercial and savings banks. If an FDIC insured bank fails, you'll be reimbursed for any lost funds up to limits.
What's covered? Checking and savings accounts at banks approved by the FDIC. Also CDs get FDIC insurance. Stocks, bonds, mutual funds and ETFs aren't covered by the FDIC, but instead, the SIPC.
But for accounts that are protected by the FDIC, the limit goes up to $250,000 per account per depositor up to a total of $1.5 million in coverage. So if you have two savings accounts at two different FDIC-insured banks, you have a total of $500,000 in coverage ($250,000 at each account).
How do you know if your bank is FDIC insured? The FDIC's BankFind system lets you look up accounts based on bank name, web address or FDIC number. Just a word of caution, just because your bank is FDIC insured, that doesn't mean all your accounts there are. For instance, if you hold a brokerage account it's not covered by FDIC, even if the bank is a member of FDIC. That's where SIPC comes in.
Sizing Up Your SIPC Coverage
For all your investment accounts, SIPC is where you get your coverage against failure. The SIPC rules are completely different than with the FDIC. But again, it's on you to confirm your financial institution is covered.
The SIPC, or Securities Investor Protection Corp., is a member-funded organization that protects investors from a failure of their brokerage. The U.S. government requires all legitimate brokers to be part of SIPC.
What Happens If Something Bad Happens
In case of a brokerage failure, the SIPC covers individuals for losses up to $500,000 per institution. But this is important: There's a $250,000 coverage limit for cash. So, if you have a $500,000 brokerage account with $400,000 in cash, the coverage would stop at $350,000, or $250,000 for the cash and $100,000 for the other securities in the account. Keep in mind that some brokerage firms, to encourage people to keep more than $500,000 with them, offer additional coverage. But additional coverage is private insurance, usually from Lloyd's of London, not SIPC.
Just know, though, the SIPC only protects you if your brokerage firm fails. If you own a stock that crashes 100% due to problems at the company, the SIPC won't reimburse you for your lousy stock pick and lack of selling discipline. But if shares of the stock go missing due to a brokerage failure, that's where the SIPC comes in. It covers stocks, bonds, Treasuries, mutual funds, money market funds and any investments classified as securities including some certificates of deposit.
It's imperative that you make sure your brokerage is a member of SIPC, which can do by checking the SIPC's member list.
Follow Matt Krantz on Twitter @mattkrantz
