This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.
The FederalReserve has raised rates to over 20 times what they were in July 2022. Here’s how to weather the consequences.
Image source: Getty Images
The same forces that tipped Silicon Valley Bank into bankruptcy are out for blood. The Fed has hiked rates at unprecedented speeds, scooping dirt-cheap interest rates from historic lows and catapulting them skyward. That’s had some interesting ripple effects on the economy:
Bank failuresA tight housing marketBallooning credit card balances
Shark Tank executive and money mogul Kevin O’Leary suggests that rates will again bankrupt banks, leaving consumer savings in limbo. If he’s right, consumer deposits could be at risk of disappearing — especially deposits at small, regional banks.
Kevin O’Leary’s thoughts on bank failure
In a CNBC interview, O’Leary addressed the effect of Fed rate hikes on the U.S. economy. O’Leary says, “I am just predicting — and I am very cautious on this — it will break down in the regional banks, which support 60% of the economy.”
How does he figure? Well, regional banks are especially susceptible to rate hikes because they are less diversified and capitalized than big banks. In other words, should small banks be caught swimming naked, they have less cash and alternative revenues to fall back upon when the tide goes out.
Specifically, O’Leary thinks regional banks will suffer from holding real estate loans. For one thing, as the cost to mortgage property rises, so does the risk of default. When consumers default on loans, lenders (banks) are forced to swallow losses.
Plus, high interest rates could cool demand for commercial real estate, dropping sticker prices. Banks that hold commercial real estate as collateral could be in trouble as those holdings become less valuable — in three words: bad for banks.
Other financial experts, including famed money manager Cathie Wood, echo the sentiment on X (formerly Twitter). Wood claims monetary policy was “the primary culprit” for bankrupting SVB and Signature Bank. But will more banks fail?
Will more banks actually fail?
It’s possible. Since March 2023, three banks have failed: First Republic, Signature Bank, and Silicon Valley Bank (SVB). But the U.S. government stepped in to prevent a bank run on Signature Bank and SVB, offering customers a one-time guarantee all deposits would be 100% refunded.
Should more banks fail, the government could again step in to protect deposits. It’s worth noting the government already covers many banking deposits up to $250,000 via FDIC insurance, which many banks offer.
But customers with more than $250,000 deposited per account, per bank could lose money if banks fail. Some customers have taken measures to secure their short-term or long-term savings to prevent worst-case scenarios.
How to protect savings from bank failure
Generally speaking, banks are safe places to put cash. The U.S. government protects many checking and savings accounts up to $250,000 per depositor, per bank, and account type insured by the FDIC. But you can take extra steps to secure cash.
You can open a savings account at one of the safest banks in the U.S. These banks are typically large, with plenty of cash to weather tough times. But in exchange for safety, you’ll probably earn less interest on savings than you could with a high-yield savings account. It’s a tradeoff.
You can also diversify savings among multiple accounts to increase how much the FDIC insures. By depositing no more than $250,000 per account at one bank, you guarantee the FDIC will reimburse you 100% should one or more of your banks fail.
Kevin O’Leary is taking a wait-and-see approach. He suggests investors “wait 90 days to see what happens in the small banking arena in the United States.” In the meantime, it’s worth watching for more bank failures.
These savings accounts are FDIC insured and could earn you 12x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you 12x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2023.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
