Mar 15, 2023 Bank Update
In light of recent events in the banking sector, we wanted to provide a recap and an overview of the impact to your accounts.
Financial markets shook last week as Silicon Valley Bank (SVB), the California bank subsidiary of SVB Financial Group (SIVB), fell into FDIC receivership. SVB is the first FDIC-insured institution to fail since 2020 and the largest by assets since Washington Mutual failed in 2008. SVB’s failure was then followed by another over the weekend, crypto-focused Signature Bank. The news, not surprisingly, caused market participants to speculate if there would be another shoe to drop.
The U.S. government stepped in to prevent spillover by offering SVB customers access to uninsured deposits. In addition, by designating SVB as a systemic risk to the banking system, the Federal Reserve (Fed) and U.S. Treasury Department can use emergency lending authority to help prevent runs on other banks. The government’s actions to backstop deposits and provide short-term funding to banks that need it reduces the odds of a systemic crisis.
Given the increasing pressures on our financial system, these events are an important reminder to stay within the FDIC insurance limits. The limits are $250,000 per individual per bank (For example, a Joint account would be FDIC insured up to $500,000 at one bank).
We also wanted to provide an overview of your investments managed by Leonard Rickey Investment Advisors, PLLC. We do not hold your assets – that is the custodian’s job. We currently use TD Ameritrade and LPL Financial as our primary custodians. TD Ameritrade was purchased by Charles Schwab in 2020 effectively making Charles Schwab the custodian of these assets.
Custody is significantly different than your assets held at a bank. Your assets are kept separate and distinct. The SEC’s Customer Protection Rule (Rule 15c3-3) safeguards customer assets by preventing firms from using customer assets to finance their proprietary businesses. It violates SEC rules for firms to merge customer assets with their own.
In addition, your accounts are covered by SIPC insurance. SIPC protects your assets in the event of Broker Dealer failure in a brokerage account up to $500,000 per customer. Since custodians must keep client assets segregated, a SIPC claim would only arise if the custodian failed. In the unlikely event of insolvency, these segregated assets are not available to general creditors and are protected against creditors’ claims. There are reporting and auditing requirements in place by government regulators to help ensure all firms comply with this rule.
In addition to SIPC, there is an extra level of coverage. Schwab maintains “excess SIPC” insurance protection for securities and cash up to an aggregate claim amount of $600 million and LPL Financial maintains coverage up to a total of $750 million. This coverage helps ensure customer claims will be covered in the event of a brokerage firm failure and funds covered by SIPC protections are exhausted.
Unlike LPL Financial, Charles Schwab is also a bank, but the custody and banking operations are separate. Cash accounts utilize the banking operations, but we have ensured that no account is above the FDIC limits. Walt Bettinger, Charles Schwab’s CEO, maintained that Charles Schwab is conservatively managed and clarified a few points in an article on the Schwab.com website. You can read the full article here.
Please reach out to your advisor for any questions or concerns.
Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).
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