The banking system recently became front-page news following the failure of two banks in March. The headlines related to bank failures can illicit very emotional responses about safety of deposit accounts and cash investment solutions.
We believe it is more important than ever to look through the headlines to the fundamentals of cash management.
Cash management fundamentally breaks down into two categories:
- Deposit accounts, and
- Cash investment solutions.
While the two have similarities, there are fundamental differences with structure and protection.
- Bank Deposits: Interest-bearing account at a banking institution, such as a savings or checking account.
- These accounts do not have market risk.
- Insured by the Federal Deposit Insurance Corporation (FDIC) to applicable limits
- FDIC deposit insurance is backed by the full faith and credit of the United States government. Currently, FDIC coverage extends to $250,000 per owner (and per account type), considering the underlying banking institution. For example, a joint account may have $500,000 of FDIC coverage at a single banking institution.
Cash Investment Solutions
- Certificates of Deposit (CDs): Investment that earns interest on a lump sum basis for a defined period of time.
- In contrast to deposits, CD’s typically offer higher interest rates versus bank deposits to compensate for monies being unavailable during the life of the investment.
- FDIC coverage applies to $250,000 per individual per issuing institution.
- Individual Treasuries: Securities issued by the US Government, can be interest-bearing or zero coupon (earn lump-sum at maturity). The term of Treasuries can vary significantly: 4 weeks to 30 years.
- Exempt from state and local taxes, but subject to federal tax.
- Not covered by FDIC insurance, rather explicitly backed by the full faith and credit of the United States government.
- Government Money Market Mutual Funds: Mutual funds that invest in Treasuries and US Government securities, paying interest on a recurring basis. Government money markets target a stable $1.00 value (not guaranteed)
- Not FDIC insured.
- Money market mutual funds underwent significant changes starting in 2016, which introduced redemption fees and liquidity gates, an effort to introduce a tool to combat any “run” on money markets. Only government money market funds are exempt from the rules surrounding redemption fees and gates (however, they can adopt them if previously disclosed to investors). Currently, none of the government money market funds offered by Raymond James have adopted redemption fees and gates.
In addition to FDIC insurance and backing of the full faith and credit of the US government, most assets held at firms such as Raymond James are covered by the Securities Investor Protection Corporation (SIPC), to applicable limits. The SIPC was established in 1970 and protects client assets up to $500,000, including $250,000 of cash. SIPC account protection would apply in the event a firm fails financially and is unable to meet obligations to clients, not against a loss in market value.
Despite the negative and unsettling headlines, there are multiple robust cash management solutions available to clients, with multiple layers of risk mitigation. At Confluence Financial Partners, we believe in the soundness of our banking system and maintain complete confidence in our client cash management tools.