How to protect your money when banks fail

The startling collapse of Silicon Valley Bank is making some people and businesses leery of stashing their cash with smaller lenders, which unlike Wall Street's financial behemoths aren't considered "too big to fail."

For business owners whose employees expect them to meet payroll, SVB's failure was particularly unnerving, prompting a wave of transfers to larger banks. Melanie Travis, founder of women's swimwear brand Andie Swim, said her immediate fear after hearing that California regulators had seized SVB was that her company might well follow its banker over the edge. 

"I've never had a feeling like that in all my years of working, and certainly not since I started Andie," she told CBS News. 

The Federal Deposit Insurance Corporation insures deposits up to $250,000. In the case of SVB's failure, where many account holders had millions of dollars in deposits, the federal government has vowed to backstop every account, with customers able to access all of their money even in excess of the FDIC's insurance cap.

But before the Biden administration announced the emergency stabilization measures, some business owners feared their hard-earned money had evaporated for good. Here's how to safeguard your cash, and what to know about protections for customers with deposits over the FDIC's $250,000 limit.

Double up

Although the FDIC only insures individual depositors up to the $250,000 limit, it has a solid track record of guaranteeing funds above the cap when banks fail.

"In most cases, it finds a healthy bank to assume deposits, and it often assumes all deposits above the FDIC limit even though it's not guaranteed," said Ken Tumin, founder of Deposit Accounts, a banking research site. To be sure, however, "Only amounts under the FDIC coverage limit can be considered completely safe," he emphasized.

Consumers can multiply the FDIC coverage limit fairly easily through a variety of methods. For one, bank deposits are insured up to $250,000 per account per bank. To reduce the administrative hassle of maintaining accounts at multiple banks, someone could have two accounts — one individual, one joint — at a single bank, upping the amount insured by the agency to $500,000.

Diversify 

But if a bank client has more than $250,000 in a single account, now may be the time to diversify, according to Howard Dvorkin, certified public accountant and chairman of Debt.com.  

"Most people should be focused on diversifying investments among regions, sizes and sectors," he said.

For a company with a $1 million payroll to meet each week, maintaining four different bank accounts, each holding $250,000, is wise, according to other financial experts. That way, every account remains under FDIC coverage limits and provides a level of safety that a single bank account can't. 

"Because large deposits don't fall within FDIC limits, they can be housed in multiple places like at Merrill Lynch, Morgan Stanley, Goldman Sachs," said Jamie Cox, managing partner for Harris Financial Group. 

If a customer prefers to work with a regional bank rather than a larger institution, they can maintain that relationship while opening up an additional account.

"If you use a regional bank as your operating bank, you should have one of the Big Four as a backup bank," said Ushir Shah, co-founder and chief technology officer of Known Holdings, an investment platform for minority fund managers.  

"As much as I love the community banking aspect of our system, when there's a crisis it's nice to have a relationship with a Big Four bank to be able to swing things over," he said.

Spread out

Some firms do the work of spreading funds out across multiple banks for the depositor, who only has to manage one relationship. Financial services companies like IntraFi take customer deposits and distribute them across its network of financial institutions, which includes roughly a third of all U.S. commercial banks.

The service effectively allows customers to see their large deposits fully covered under FDIC insurance through a single relationship, rather than having to manage multiple accounts.

"They allow you to diversify your cash holdings over a broad array of banks, keeping balances at each institution under the FDIC limit," Cox said. 

In the wake of the turmoil following the failure of SVB and New York's Signature Bank, he expects more Americans to rely upon these kinds of financial planning services.

"More people are going to use tools to help them consolidate their [deposit statements]. People paid no attention to risks associated with the convenience of keeping everything at one bank, and now people are going to go in the opposite direction and be more mindful of the risk rather than convenience," Cox predicted. 

Go big

Naveen Jain, founder and CEO of digital health company Viome, which studies the causes of chronic diseases to better detect early-stage cancers and more, became a client of SVB after launching his company seven years ago. He chose the bank at the recommendation of his investors and because it catered to customers in the life sciences industry. 

After its collapse, though, he doesn't believe his funds are safe outside one of the four largest banking institutions in the U.S.

"It looks like only the top four banks — JPMorgan Chase, Wells Fargo, Bank of America and Citibank — those that are 'too big to fail,' are safe," he told CBS MoneyWatch.