Bank Alternatives for Cash
Sometimes cash is like an egg and you just want to sit on it to protect it as a safety net. Save it for a rainy day. But, how safe is it to sit on cash? It’s not like you want to intentionally shatter your precious eggs, right? During times of emergency, it’s important to protect your cash.
Most people believe banks are safe. You know, FDIC insured. We’ve all heard the safety of banks but they do fail into bankruptcy sometimes. We currently see a few bank failures file for bankruptcy such as Silver Gate Bank, Silicon Valley Bank, and Signature Bank. All are US bank with FDIC insured accounts. An important thing to know is FDIC protects you up to $250,000 per individual account and entity. Keep in mind, the bankruptcy preference for individual accounts and entities such as a trust are paid out in different time frames. Individuals are paid out in 2 days and entities would require supplemental documents to determine ownership. Also, a fiduciary is responsible for payment if they are a custodian which adds another element of risk. This begets the question of how many parties of risk are there?
What happens when you have over $250,000 cash eggs? That’s a question to determine upon risk. What is the risk? The risk is beyond FDIC and upon counter party risk. The bankruptcy of Blockfi, Celsius, and Voyager are examples of shadow banking with unknown counter party risks. An alternative is assets in a broker dealer with SIPC protection which is used to protect against a broker dealers bankruptcy. SIPC protection is $500,000 assets of $250,000 cash included. And, many brokers dealers have insurance above SIPC with private insurance.
Another option to minimize counter party risks is direct ownership in short term US treasuries. Instead of depending on custodianship risks, direct ownership of US Tresasury bonds is an option. The counterparty risk is the US governments ability to pay back it’s debt. That risk is the ability to tax and historically risk free.
As we come into these volatile markets of interest rates and risks, there needs to be predefined paths for managing safety nest risks for cash. Choose wisely. Who is risk and who is counter party risk? Contact our wealth advisors today to manage your financial risk and options.