Last week’s bank crisis that caused the failure of three banks sent a powerful message rippling through the financial world: risk is a real thing. Since this type of event can kick off mass hysteria,  I want to take a pause and examine what we can learn about how we manage our finances. I see three main takeaways: 

1. We shouldn’t be complacent about risks, even if they seem unlikely. (Who knew that there would be a banking run and failure in 2023?) 
2. The unexpected can happen at literally any time. 
3. Rising interest rates have consequences and can cause systems to break.

Don’t be complacent about risk, even if it is unlikely 

In the most literal sense, these crises have reminded us to be vigilant about how much money we have in our banks.  If you’re a client of Thinking Big, we have already managed this risk as a natural part of our planning. These crises, while caused by some fundamental issues, were exacerbated by a crisis of confidence. So much of our banking system is based on faith. When confidence crumbles, so do banks caught in the crosshairs. But whether it is a bank crisis, a pandemic, war, or some other unexpected event, the important thing to ask is, ”Have I prepared the best I can for the risks that may play out?” The crisis may have no impact on you at all too.

Consider and plan for the improbable (like a bank failure)

Just last year, I had several conversations with clients (some of whom are business owners with lots of cash to manage) who asked if it was really necessary to worry about how much money they had in a bank. The idea that a large bank would fail seemed improbable (the last bank failure was about 15 years ago). I was tempted to think that it didn’t really matter. But – ever my conservative self – I thought, “Why not be safe in case the unexpected does indeed happen?” Instead of downplaying the risk, I advised my clients to keep only the insured amounts in one bank and spread out the rest of the cash in other banks or US Treasuries. As a result, they were not at risk even if a bank were to fail. 

When things are calm, we think the unexpected is unlikely to happen. But recent events remind us that good planning means preparing for the unexpected – even if doing so seems overly conservative.  

A Note About FDIC Insurance
In the wake of the banking crisis, there is a question about whether FDIC insurance is even relevant anymore since the government insured all of the deposits of the two failed banks. US Treasury Secretary Janet Yellen has been clear that this is not a blanketed insurance for all banks and deposit amounts. If it is to be a new explicit guarantee, it has yet to be made official. So let’s not count on it. 
Risk in the banking system is likely to continue for some time.  Check out this FDIC Insurance primer. If you have $250k or less of cash savings (which is most people), this is not really a concern for you. If you have more than that, it’s time to dust off the playbook and make sure you are protected. In either case, if cash savings are the cornerstone of your financial plan, now is a good time to ask questions. 

Rising interest rates have consequences

Combined with poor management at some banks, rising interest rates precipitated this crisis. As we talked about in another post,  rising interest rates have a wide impact that can filter through our economy quickly or slowly, depending on mitigating factors.. In this case, interest rates have been rising for the past year and we’re now starting to see the fallout. 

The impact of rising interest rates is likely to continue. These events may cause the trajectory of interest rate increases to change, but it’s too early to tell. For now, assume that the stormy weather will continue.

The point of good planning is to prepare for the unexpected so you can move when situations change. I hope that despite the recent unexpected events, you can find some odd comfort in the fact that we can’t control them. What we can control is how we’ve planned for a crisis, even when we’re not expecting one.