In modern times, most bank depositors are not concerned about a bank run when a large number of customers withdraw their deposits at the same time causing a bank failure, because for the majority of people their deposits are fully insured by the FDIC. The FDIC was formed in 1933 in the wake of the Great Depression to restore faith in banks, and at that point the FDIC insured every depositor for $2,500. If we adjust for inflation, we will have insurance for about $58,000 per account, but the limit has been raised far beyond that, to $250,000. In addition to checking accounts, certain other accounts may be insured as well, such as savings accounts and CDs.
Because of this insurance, bank runs are rare, but not impossible. Although with the FDIC insurance the risk of their funds disappearing completely is gone for most depositors, it doesn’t mean that a bank run can’t happen, or that a bank can’t fail. In fact, according to a recent Reuters article, deposits at small banks fell $119 billion following the week of March 15th, which more than doubled the record for the last decline and was the biggest decline since the week that ended March 16th, 2007.
Many people’s understanding of a bank run likely comes from Frank Capra’s film It’s a Wonderful Life, and this scene of the run for deposits at the savings and loan. Our hero explains to the anxious depositors demanding their money that he has lent their funds to help the community, there is not enough cash on hand to satisfy everyone. “Your money is in Joe’s house,” and so on. Depositors lend their money to the bank for the short term, and the bank invests or lends the funds for the longer term, keeping only enough cash on hand to meet ordinary day-to-day withdrawal needs.
If you have trust, you don’t have to worry about your funds being in “Joe’s House”
In fact, trust assets are all held separately from the assets of the bank. Banks must not only segregate client trust assets and maintain them in separate accounts, but also establish and maintain a separate set of books to distinguish between every transaction happening in those accounts. Your trust belongs to you (or your beneficiaries), so the bank’s creditors have no claim to it. While it is possible to lose money in a trust account, that would be due to investment changes, not because the bank fails, and most trust account investments are very conservative and relatively safe.
Should the bank or trust company fail though and be bought by another bank (as Silicon Valley Bank was bought by First Citizens bank), the trust assets would then be overseen by the acquiring bank.
What if I don’t want my trust handled by the new bank?
It certainly makes sense that some customers may not be happy with a new bank handling the trust, after all, the acquiring bank may be headquartered in a different state as in the example above. If the trust beneficiaries do not want to continue the relationship with the new institution, the trust assets can be transferred to another institution to manage them (feel free to consider Garden State Trust Company, should this ever happen to you).
Other things to consider regarding asset preservation for those with high net worth
Although a bank failure may not cause trust assets to go up in smoke, there are other things to consider that can mitigate risk in an investment portfolio. There are many risks to consider beyond a bank failure, such as inflation risk, or interest rate risk, or the risk associated with overconcentration in a particular asset class. At Garden State Trust Company, we understand that clients have different appetites for risk and that some risk may be needed to achieve client goals as well. If you’d like to meet to discuss how your assets might be (or might not be) at risk, let us know. We’d be pleased to provide a comprehensive review with you.