Ways to minimize bank bankruptcy exposure?

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PurpleArc
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Ways to minimize bank bankruptcy exposure?

Post by PurpleArc »

Hi guys,

Assuming a person plans to put 1M USD into savings, how does he allocate it efficiently to prevent bank runs? Should he go for the max amount each government is insuring? FDIC is 250K USD so does he open four accounts accounts with 250K each? That sounds feasible with 1M USD, but what if it goes to 10M USD money savings.

I know the best is to put all the money savings into funds. Hence same question. While FDIC doesn't insure I guess the logic is also to spread out stock portfolios with different brokers, to minimize bank/broker run?

How best to minimize such risks?
Last edited by PurpleArc on Wed Apr 29, 2020 10:02 pm, edited 2 times in total.
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Maple
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Re: Ways to minimize bank run exposure?

Post by Maple »

PurpleArc wrote: Tue Apr 28, 2020 11:31 pm ... I know the best is to put all the money savings into funds. Hence same question.

While FDIC doesn't insure I guess the logic is also to spread out stock portfolios with different brokers, to minimize bank/broker run?

How best to minimize such risks?
SPIC insures brokerage accounts, with limitations. Still, it is a good idea to spread out your stock portfolio with different brokers.
Iridium
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Re: Ways to minimize bank run exposure?

Post by Iridium »

There are creative ways to title an account to get more FDIC insurance. If the problem is merely a bank run and not a real problem with the bank, then usually FDIC finds another bank willing to take on all deposit liability (including >$250K accounts) in return for all the bank's assets. However, on the occasion a bank made bad loans, banks can fail hard, resulting in as little as a 50% recovery.

If you are having to handle $10M, the truly paranoid approach is ICS (Insured Cash Sweep), which is a service offered by some banks where banks in the network trade cash with each other, such that, technically, your money would end up in 40 different places behind the scenes, but all customer service, statements, etc. are handled by the bank you opened the account at.

My more common advice is to just put the money into a money market fund. The worst MMF failure lost less than 2%, and regulations have tightened considerably since then.

As far as brokerage failure risk, I consider it roughly zero if you go with any broker you have heard of. When you deposit money in the bank, you are lending the bank money. Your repayment comes from the bank's ability to pay you back. Whereas, a broker merely has custody of your assets, not legal ownership. If your broker goes belly up, it doesn't impact your assets at all, just as the failure of a self storage place wouldn't prevent you from getting your stuff back. Pretty much the only risk is if the broker steals your assets out from under you. That is where SIPC kicks in. For a bit of extra protection, look for a broker with at least $100M of aggregate excess SIPC insurance. The insurance limit wouldn't cover 1% of assets held at any broker you would have heard of, so it is useless as insurance. Its use is knowing that the broker's policy and procedures were strong enough that someone was willing to make an 8 figure bet that they would not defraud customers. As far as I'm aware, the only broker that put their customer assets even slightly at risk and carried excess SIPC in any amount was MF Global, and those customers were made completely whole without the need for SIPC or the excess SIPC policy to contribute. The most costly broker failure in recent history was Bernie Madoff, but they never got an excess SIPC policy (either because things smelled too fishy to the insurance underwriter or because Bernie didn't want anyone extra sniffing around their books).
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Re: Ways to minimize bank run exposure?

Post by Watty »

You could also buy individual treasury bills and notes.
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Re: Ways to minimize bank run exposure?

Post by Valuethinker »

As this sub board is for non US investors is this the appropriate place for a discussion of FDIC etc?
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Re: Ways to minimize bank run exposure?

Post by Iridium »

Valuethinker wrote: Wed Apr 29, 2020 4:16 am As this sub board is for non US investors is this the appropriate place for a discussion of FDIC etc?
Good catch.

OP, we would need to know where you live to give good advice.
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Re: Ways to minimize bank run exposure?

Post by DJN »

Hi,
if the op is non-US there is a non-US section on Bogleheads Wiki on cash equivalents which talks a bit about bank guarantees.
See here: https://www.bogleheads.org/wiki/Cash_eq ... _investors
The EU bank guarantee scheme is for an amount up to €100,000 per person per insured institution.
UK equivalent is £85,000 on the same basis.
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Re: Ways to minimize bank run exposure?

Post by Call_Me_Op »

PurpleArc wrote: Tue Apr 28, 2020 11:31 pm Hi guys,

Assuming a person plans to put 1M USD into savings, how does he allocate it efficiently to prevent bank runs? Should he go for the max amount each government is insuring? FDIC is 250K USD so does he open four accounts accounts with 250K each? That sounds feasible with 1M USD, but what if it goes to 10M USD money savings.

I know the best is to put all the money savings into funds. Hence same question. While FDIC doesn't insure I guess the logic is also to spread out stock portfolios with different brokers, to minimize bank/broker run?

How best to minimize such risks?
if I had much more than $1 million I wanted to keep absolutely safe, I would look to US treasuries - not bank CDs.
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Re: Ways to minimize bank run exposure?

Post by JoMoney »

CDARS is a program many banks participate in, which allows someone to deposit multi-million dollars across multiple banks to ensure they stay under FDIC limits while keeping it consolidated to a single statement and administrator.

You can buy U.S. Treasuries and hold them directly (not through a brokerage)... you can hold stocks and mutual funds directly too.

Even if you hold securities at a brokerage, those are accounted for and held separately than the brokerages assets and would not be available to someone else if there was a "run" on the brokerage or the brokerage otherwise went bankrupt. There is an issue where the brokerage could theoreticly mis-account for someones assets through fraud or negligence and securities come up missing - in that case SIPC would come into play, as well as the brokerages liability (if they're still solvent), along with additional insurance which most large brokerages have. Fidelity brokerage for example has a billion dollar extra insurance
https://www.fidelity.com/why-fidelity/s ... r-accounts (under SIPC tab)
Excess of SIPC
In addition to SIPC protection, Fidelity provides its brokerage customers with additional "excess of SIPC" coverage. The excess coverage would only be used when SIPC coverage is exhausted. Like SIPC, excess protection does not cover investment losses in customer accounts due to market fluctuation. It also does not cover other claims for losses incurred while broker-dealers remain in business. For example, fraud claims would not be covered if the brokerage firm was still in operation. Total aggregate excess of SIPC coverage available through Fidelity's excess of SIPC policy is $1 billion. Within Fidelity's excess of SIPC coverage, there is no per customer dollar limit on coverage of securities, but there is a per customer limit of $1.9 million on coverage of cash awaiting investment. This is the maximum excess of SIPC protection currently available in the brokerage industry.

Both SIPC and excess of SIPC coverage is limited to securities held in brokerage positions, including mutual funds if held in your brokerage account and securities held in book entry form.
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Re: Ways to minimize bank run exposure?

Post by AlphaLess »

PurpleArc wrote: Tue Apr 28, 2020 11:31 pm Hi guys,

Assuming a person plans to put 1M USD into savings, how does he allocate it efficiently to prevent bank runs? Should he go for the max amount each government is insuring? FDIC is 250K USD so does he open four accounts accounts with 250K each? That sounds feasible with 1M USD, but what if it goes to 10M USD money savings.

I know the best is to put all the money savings into funds. Hence same question. While FDIC doesn't insure I guess the logic is also to spread out stock portfolios with different brokers, to minimize bank/broker run?

How best to minimize such risks?
Is this is a hypothetical, or real?

A solution for $1M will be very different from $10M.

For $10M, go for CDARS.

For $1M, you can probably do 5 banks for $200K.

If you have a second SSN, you can probably do $200 x 3 per bank (2 individuals, each $200K, plus one joint $200K).

I say $200K vs $250K for margin, but you can reduce the margin to 3%, and push it to $240K.
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Re: Ways to minimize bank run exposure?

Post by bberris »

A bank run is really a non-event for a US bank. I don't know where you are, but first world countries (and some others) have a banking system that supplies all the cash a bank could possibly need. A bank run does not cause insolvency in the modern world.

Insolvency can be caused by loan losses or trading losses. That is where FDIC would come in if the failed bank was not bought out.
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Re: Ways to minimize bank run exposure?

Post by PurpleArc »

Iridium wrote: Wed Apr 29, 2020 4:46 am
Valuethinker wrote: Wed Apr 29, 2020 4:16 am As this sub board is for non US investors is this the appropriate place for a discussion of FDIC etc?
Good catch.

OP, we would need to know where you live to give good advice.
Resident and tax payer in Singapore.


About banks going belly up. That is my main concern, call me paranoid but I'd like to have comfort knowing that if a banks defaults our money don't go with it. In Singapore the insured sum is 75K SGD, so if you have 750K SGD (~ 500K USD) I'd have to go to ten banks, which isn't very practical. Some people enjoy logging into and maintaining ten accounts, I don't.

About brokerage going belly up. I appreciate your comments, a "broker-run" has a much lower probability as I suspected, as it is a custodian role rather than a lenders role. As @JoMoney also highlighted.
JoMoney wrote: Wed Apr 29, 2020 8:07 am those are accounted for and held separately than the brokerages assets and would not be available to someone else if there was a "run" on the brokerage or the brokerage otherwise went bankrupt.
Last edited by PurpleArc on Wed Apr 29, 2020 7:08 pm, edited 3 times in total.
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Re: Ways to minimize bank run exposure?

Post by PurpleArc »

AlphaLess wrote: Wed Apr 29, 2020 12:03 pm
PurpleArc wrote: Tue Apr 28, 2020 11:31 pm Hi guys,

Assuming a person plans to put 1M USD into savings, how does he allocate it efficiently to prevent bank runs? Should he go for the max amount each government is insuring? FDIC is 250K USD so does he open four accounts accounts with 250K each? That sounds feasible with 1M USD, but what if it goes to 10M USD money savings.

I know the best is to put all the money savings into funds. Hence same question. While FDIC doesn't insure I guess the logic is also to spread out stock portfolios with different brokers, to minimize bank/broker run?

How best to minimize such risks?
Is this is a hypothetical, or real?

A solution for $1M will be very different from $10M.

For $10M, go for CDARS.

For $1M, you can probably do 5 banks for $200K.

If you have a second SSN, you can probably do $200 x 3 per bank (2 individuals, each $200K, plus one joint $200K).

I say $200K vs $250K for margin, but you can reduce the margin to 3%, and push it to $240K.
Real ~$1M. Singapore resident.

Right now I mainly put them as TD in Singapore and Hong Kong banks.

US treasuries seems to be possible though I don't know how to do that via Singapore or HK banks. My Wells Fargo account, the only account I maintain in the US is just a simple checking account, and don't offer and no stock trading. My European bank accounts but they seem to have close to zero interest, heck they even want to charge sometimes.

An options is to go open offshores but I don't really feel comfortable, except maybe Jersey or Isle of Man. For example HSBC Expat account which l might give it a go.

Why go through all this seemingly unnecessary hassle? A collapse of first world government in the next 30 years is not enitrely impossible - OECD Cyprus with their major bank shutting down years ago and people are only returned their "FDIC" insured sum. There is also a scenario of not just a bank collapsing but the entire government or country. I know it's super super unlikely, but hey give it a 30 - 50 year horizon, maybe it's not so impossible. Hence the principle different jurisdiction, organization, assets class etc.
Last edited by PurpleArc on Wed Apr 29, 2020 10:00 pm, edited 1 time in total.
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Re: Ways to minimize bank run exposure?

Post by galeno »

Yes! Absolutely!

As a USA-NRA you NEVER want to hold more than $60K in your (USA) broker's MMF. That MMF is considered to be an USA domicled asset subject to a 40% USA inheritance tax on any USA-NRA w/o USA tax treaties on every $1 over $60K. Bad news.

We have access to USA FDIC insured CDs via our broker IB. For some STRANGE reason. USA FDIC Bank accounts AND their CDs are NOT USA domicled assets and are NOT subject to that very nasty USA inheritance taxes. Neither are US Treasuries bought directly.
Valuethinker wrote: Wed Apr 29, 2020 4:16 am As this sub board is for non US investors is this the appropriate place for a discussion of FDIC etc?
Last edited by galeno on Wed Apr 29, 2020 7:54 pm, edited 1 time in total.
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Re: Ways to minimize bank run exposure?

Post by galeno »

Regarding bank runs. We are always afraid of them. But we are MORE afraid of "express kidnappings". How do we deal with both?

We begin each year with 5% of port in CASH. We then wire transfer all but $100 to a bank account in Panama that my wife and I opened up in the early 1980s (due to fear of the Sandinista revolution). That way we avoid the $60K limit in our broker's MMF. From Panama we wire transfer one month of living expenses into one of our CR bank accounts.

We keep 2 months of living expenses in our CR bank accounts. One month in each. We only carry around one debit card. We have a $1K limit per day on our debit cards via ATMs. So the most an express kidnapper can get is $1K. And the most CR banks will get is 2 months of living expenses.

We also keep 2 months of living expenses in small USD denominations ($1 and $5 bills) hidden in a secret place. Just in case.

Also when I go out I carry only my national iD card and approximately $50 USD in local currency in my wallet. The rest of my cards and money is in a money belt. The $50 is so the assailant(s) doesn't stab me with a knife.
Last edited by galeno on Wed Apr 29, 2020 7:49 pm, edited 1 time in total.
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Re: Ways to minimize bank run exposure?

Post by abuss368 »

I would not keep $1 MILLION in any bank. Simply invest the cash or consider a combination of short term bond funds and money market funds.
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Re: Ways to minimize bank run exposure?

Post by galeno »

Why not 4 USA FDIC insured bank accounts? Or 40 if you have $10M?
abuss368 wrote: Wed Apr 29, 2020 7:45 pm I would not keep $1 MILLION in any bank. Simply invest the cash or consider a combination of short term bond funds and money market funds.
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Re: Ways to minimize bank run exposure?

Post by abuss368 »

galeno wrote: Wed Apr 29, 2020 7:51 pm Why not 4 USA FDIC insured bank accounts? Or 40 if you have $10M?
abuss368 wrote: Wed Apr 29, 2020 7:45 pm I would not keep $1 MILLION in any bank. Simply invest the cash or consider a combination of short term bond funds and money market funds.
Works too!
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Re: Ways to minimize bank run exposure?

Post by PurpleArc »

abuss368 wrote: Wed Apr 29, 2020 7:45 pm I would not keep $1 MILLION in any bank. Simply invest the cash or consider a combination of short term bond funds and money market funds.
Absolutely a possibility.

Though glass half full as the original question is not to seek investment but a safe way to place in savings.

MMM are considered investments and not deposits, they are not insured against loss by the FDIC.
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Re: Ways to minimize bank run exposure?

Post by abuss368 »

PurpleArc wrote: Wed Apr 29, 2020 10:08 pm
abuss368 wrote: Wed Apr 29, 2020 7:45 pm I would not keep $1 MILLION in any bank. Simply invest the cash or consider a combination of short term bond funds and money market funds.
Absolutely a possibility.

Though glass half full as the original question is not to seek investment but a safe way to place in savings.

MMM are considered investments and not deposits, they are not insured against loss by the FDIC.
Correct. There is a difference between a money market deposit account and a money market mutual fund.
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Re: Ways to minimize bank run exposure?

Post by AlphaLess »

galeno wrote: Wed Apr 29, 2020 7:42 pm Regarding bank runs. We are always afraid of them. But we are MORE afraid of "express kidnappings". How do we deal with both?

We begin each year with 5% of port in CASH. We then wire transfer all but $100 to a bank account in Panama that my wife and I opened up in the early 1980s (due to fear of the Sandinista revolution). That way we avoid the $60K limit in our broker's MMF. From Panama we wire transfer one month of living expenses into one of our CR bank accounts.

We keep 2 months of living expenses in our CR bank accounts. One month in each. We only carry around one debit card. We have a $1K limit per day on our debit cards via ATMs. So the most an express kidnapper can get is $1K. And the most CR banks will get is 2 months of living expenses.

We also keep 2 months of living expenses in small USD denominations ($1 and $5 bills) hidden in a secret place. Just in case.

Also when I go out I carry only my national iD card and approximately $50 USD in local currency in my wallet. The rest of my cards and money is in a money belt. The $50 is so the assailant(s) doesn't stab me with a knife.
Nice plan. What is CR? Costa Rica?
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Re: Ways to minimize bank bankruptcy exposure?

Post by galeno »

Correct.

"Nice plan. What is CR? Costa Rica?"
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Re: Ways to minimize bank run exposure?

Post by patrick »

abuss368 wrote: Wed Apr 29, 2020 7:45 pm I would not keep $1 MILLION in any bank. Simply invest the cash or consider a combination of short term bond funds and money market funds.
Bank accounts currently have much higher yield. You can get 1.75% on plain deposit accounts versus 0.63% on Vanguard prime money market and 0.82% on short term bond index. Depending on how you apportion it you would miss about ten thousand a year in interest on a million dollar investment
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Re: Ways to minimize bank run exposure?

Post by abuss368 »

patrick wrote: Sat May 02, 2020 2:11 pm
abuss368 wrote: Wed Apr 29, 2020 7:45 pm I would not keep $1 MILLION in any bank. Simply invest the cash or consider a combination of short term bond funds and money market funds.
Bank accounts currently have much higher yield. You can get 1.75% on plain deposit accounts versus 0.63% on Vanguard prime money market and 0.82% on short term bond index. Depending on how you apportion it you would miss about ten thousand a year in interest on a million dollar investment
Thanks.
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Re: Ways to minimize bank run exposure?

Post by bitmouse »

patrick wrote: Sat May 02, 2020 2:11 pm Bank accounts currently have much higher yield. You can get 1.75% on plain deposit accounts versus 0.63% on Vanguard prime money market and 0.82% on short term bond index. Depending on how you apportion it you would miss about ten thousand a year in interest on a million dollar investment
1.75% on plain deposit accounts in non-UK EU countries isn't realistic at the moment. The highest I've seen is for 4-5 year CDs and is 1.2% (from rasin/weltsparen)

Money Market Funds are not easily accessible to your average EU personal investor (more info). Of course if you have 1M, then you probably can get access.
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