Broker Check
FDIC, SIPC, and Repayment Priority: Three Things You Should Know to Secure Your Wealth

FDIC, SIPC, and Repayment Priority: Three Things You Should Know to Secure Your Wealth

March 26, 2023

Silicon Valley Bank, a well-known bank specializing in the technology and innovation sectors, failed just two days after experiencing a $42 billion withdrawal.

Signature Bank, one of the largest commercial banks involved in the digital currency space in New York City, Shortly after SVB's closure, also shut down.

Even Credit Suisse, a globally renowned bank with over 160 years of history, despite its resilience during the financial crisis in 2008 when it did not receive government assistance, is facing a potential takeover.

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These events have left a lasting impression on investors, particularly high-net-worth individuals who have accounts with these banks or have invested in their funds. While the government protected depositors at SVB, investors in other banks affected by these crises may have suffered losses.

To protect our wealth in the face of market uncertainties, it is essential to be aware of key concepts such as FDIC (Federal Deposit Insurance Corporation), SIPC (Securities Investor Protection Corporation), and capital structure with repayment priority. These can help us safeguard our investments and prepare us for potential risks.

The first step towards securing your wealth is understanding the FDIC's role. The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government that protects depositors of insured banks in the United States against losing their deposits if an insured bank fails. The FDIC is backed by the full faith and credit of the United States government, which means that depositors can have confidence in the safety and security of their funds held in FDIC-insured banks.

FDIC insurance applies to all types of deposits (including checking, savings, money market deposits, etc.) received at an insured bank, but it does not cover investments such as mutual funds, annuities, or U.S. Treasury bills. The standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. High-net-worth individuals may wonder how this can be enough to protect their assets, considering their net worth exceeds $250,000. It is important to note that exceeding this amount does not necessarily mean a significant loss in case of bank failure, as the FDIC insures each account ownership category separately. However, it is advisable to spread funds across multiple banks to minimize risk and ensure the protection of assets.

Diversifying your wealth across different banks can help mitigate risk, but it's important to note that fully utilizing ownership categories can make a significant difference, even if a large portion of your wealth is with a single bank. The following illustration shows how proper technique can insure up to $3 million. By using different account ownership categories, such as individual accounts, joint accounts, retirement accounts, and trust accounts, it is possible to increase FDIC insurance coverage for each bank account. It is crucial to consult with a financial advisor or do thorough research to understand how to structure accounts to maximize FDIC insurance coverage properly.

(Source: Federal Deposit Insurance Corporation)

However, it is essential to note that the government does not insure investments held in brokerage firms in the same way as bank deposits. Investors should be aware of the risks involved in their investments and take steps to mitigate those risks. In the case of Silicon Valley Bank's closure, equity holders may not receive compensation because they are last in line to receive payment in case of a bank failure. What is the reason for this?

By understanding a corporation's capital structure and repayment priority, we may be a step closer to approaching the answer – the second important concept you should know to secure your wealth. Generally, a firm uses a mix of different types of financing to fund its operations and investments. The capital structure typically includes debt and equity, and the proportion of each can vary depending on the company's specific needs and financial goals.

Debt financing refers to borrowing money from lenders or issuing bonds, which the company must repay with interest over time. This can include bank loans, corporate bonds, and other forms of debt. The use of debt can help a company to fund its operations without diluting ownership or control of the company, but it also comes with the obligation to make regular interest payments and repay the principal.

Equity financing, on the other hand, involves the sale of ownership shares in the company, typically in the form of common stock or preferred stock. This enables the company to raise funds without incurring debt or interest payments. However, equity holders have residual claims, meaning they are the last to receive payment. In the event of a company's failure, equity holders may face significant losses and potentially receive no compensation.

The illustration below shows the priority of repayment to different investors. Things may get complicated in the Credit Suisse case since it involves the CoCo Perpetuals, which are wiped out before equity holders absorb the losses.

(Source: BondEvalue)

If a bank crisis or other factors lead to the failure of your brokerage, you may wonder if your investment will disappear. The third important concept you should know to be your wealth guard is that brokerage firms are legally required to segregate customer securities and funds. This means that customers' assets must be held separately and not mixed with the firm's own assets. The segregation of securities helps ensure that customer assets are protected and can be returned to them if the brokerage firm fails. This is an important aspect to consider when safeguarding your wealth.

However, in the case of fraud committed by the brokerage firm, investors may not be fully protected. For example, a brokerage firm could borrow your securities without your knowledge and for their own benefit. If the firm fails, can you seek protection from FDIC? Unlike FDIC, which protects depositors when the bank fails, SIPC, Securities Investor Protection Corporation, is a nonprofit corporation that the U.S. Congress created in 1970 to protect customers of brokerage firms in the event of their failure. If a brokerage firm fails, SIPC steps in to help customers recover their assets, such as cash and securities, up to certain limits. The amount of protection provided by SIPC is up to $500,000 for securities and cash held in brokerage accounts, with a limit of $250,000 for cash alone. This protection is designed to help investors feel more secure in their investments and to promote confidence in the securities markets.

Wealth safety awareness is an essential issue that everyone, regardless of their net worth, should take seriously. There are many different strategies that individuals can use to safeguard their wealth, including diversifying their investments, working with a trusted financial advisor, and regularly reviewing their financial plans. It's also essential to stay informed about economic and market trends and to be aware of potential risks that could impact your investments. Wealth safety is not just about protecting your assets but also about managing your financial risks and ensuring that you have a solid plan in place for achieving your long-term financial goals. By taking a proactive approach to wealth safety and staying informed about the latest trends and strategies, you can help ensure that you are well-prepared for whatever the future may bring.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. 

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax 

issues with a qualified tax advisor.