By Ted David
When talking about investing in various financial instruments, we always talk about “risk tolerance.” The current turmoil in the financial sector makes this topic more important than ever.
Depending on your age, how much money you have and when you will need the money, you always have to consider whether the investment is right for you, in terms of the potential risk that you lose your investment. As a result, many people, in this ever-increasing interest rate climate, have opted for certificates of deposit or CDs.
Let’s be clear that money market accounts, which may be high-yield, and insured by the Federal Deposit Insurance Corporation are still not the same thing as a certificate of deposit. With the certificate of deposit, you are locking up your money for a particular amount of time, at a particular rate of return. In a money market account, you can take your money out with no penalty, at any time.
What kind of bank?
With that distinction in mind, let’s talk about CDs in the context of the banks that issue them. It’s often helpful to know what kind of banking the bank does! For example, if you’re someone who has decided to have absolutely nothing to do with cryptocurrency, it would be helpful to know if the bank from which you are buying a CD is heavily invested in cryptocurrency.
And that brings us to today’s story. I have a substantial amount of money (low 6 figures) in a CD through Edward Jones. That CD was invested in Silvergate Bank of La Jolla, California. I just got a phone call from my EJ advisor telling me that that bank has gone bankrupt. I'm not concerned about it because the CD is due in 10 days and he tells me the bank will pay on maturity, or even sooner. Again, it is FDIC insured.
And then, as I was writing this piece, another story crossed the wire about Silicon Valley Bank (SVB), which has just been shut down by regulators in what is called “the biggest bank failure since the global financial crisis of 2008.”
According to CNBC, the FDIC says in its announcement that ensured SVB depositors will have access to their deposits within than three days and all the bank’s branch offices will reopen under the control of the FDIC. Each account is insured up to $250,000 per depositor.
CNBC.com notes, “While SVB’s situation is somewhat unique because its funding base focused on tech start-ups, other banks with large bond portfolios could face similar issues if they were forced to sell those bonds before maturity in order to raise funds. Treasuries have fallen in value the last 12 months as the Federal Reserve hiked rates eight times. Those bond sales could incur losses like what has occurred with Silicon Valley Bank.”
High-risk funding of tech startups
Given this bank’s high-risk funding of tech startups alone, it would have been best avoided when choosing CDs. The lesson to be learned here is that, even if you think you have no exposure to cryptocurrency or other risky businesses, maybe you do, indirectly.
The Street.com says about Silvergate, “The bank was where most of the big crypto firms went, because traditional banks did not want to do business with them, due to warnings from regulators who consider the crypto industry to be a risky sector. " At one time, Silvergate was likely a reasonable place to buy a CD. Silvergate was established in 1988. The bank initially specialized in lending to industrial customers and, at the time, also offered loans for both residential and commercial real estate. But then came Crypto and that is when reasonable turned to risky.
Just a caveat. Even if you're buying what you think are safe, insured investments, make sure they have no exposure to crypto. And make sure they have no exposure to any other potential risky business.
If you are choosing CDs on your own, be sure to take a look at the bank that is selling these CDs. Google the bank. Get a sense of what kind of businesses they are involved in. What is their likely exposure to loan losses, to crypto, and other potential risk factors banks face?
This is why it is helpful to use an advisor, even when purchasing CDs, because they are in a better position to check research and keep you informed about the safest places to park your money.
When shopping for CDs ...
Some rules of thumb when shopping for CDs:
Make sure it is FDIC insured, look for a high coupon rate, make sure it is a primary or “new” offering and make sure it is not callable. Finally, and I cannot stress this too much, take a look at what the bank’s share price is doing and what kind of banking it's involved in. Look for potential risk factors in the bank's operations.
The more you know!
American financial journalist Ted David was a founding anchor at CNBC in 1989 and spent the following 20 years there as an anchor on TV and on CNBC Radio.
Before joining CNBC, Ted was an ABC Radio News correspondent specializing in consumer reporting.