After the collapse of SVB and Signature Bank, I decided to review our existing banking relationships and see if we are well positioned to weather another potential bank run. I also wanted to share with you the ideal number of banking relationships to have to feel safe and sound.
When I first started Financial Samurai in 2009, I recommended having three banking relationships.
- One for operations / working capital
- One for borrowing
- One for investing
Back in 2009, we were in the middle of the global financial crisis. Lehman, Bear Sterns, Washington Mutual, and a number of other financial institutions were failing. Spreading out your deposits if you had more than the FDIC-insured $250,000 per bank and ownership was a rational move.
At the time, having three banking relationships was more than enough to protect my cash. The main reason why I wanted three banking relationships was for optimization purposes.
Today, I still feel three banking relationships is the ideal number to have for those who have more than $250,000 in cash, investments, or loans. For those with less than $250,000 in assets or liabilities, I'd go with at least two banking relationships and work your way up to three.
Three Banking Relationships For The Best Terms
The main reason why I decided to go with three banks was to get the best terms.
My “operational bank” provided the most conveniences. My “borrowing bank” had the lowest mortgage rates. Finally, my “investing bank” had the lowest trading fees and the best user interface.
The downsides of having three banking relationships are more financial accounts to keep track of and more tax forms each year.
Let me explain a little more.
1) The Operations Bank – Convenience And Low Fees
The first banking relationship I opened was with Citibank back in 1999 in New York City. Citibank had branches everywhere, which made it easy for me to withdraw cash at ATM machines without a fee. I pay all my capital calls with my operations bank too.
As someone who worked in international equities, I also had to travel to Asia a lot for business. As a global bank, Citibank had branches everywhere to withdraw local currency without a fee. Its foreign exchange rates were also more favorable at the time.
Then in 2002, something scary happened. I arrived in Beijing at about 8 pm after a long 12-hour flight from San Francisco. Given I was wide awake, I decided to roam the streets for some food and scenery close by. I studied abroad in Beijing in 1997 and spoke Mandarin, so I was comfortable wandering around by myself at night.
After going into a bar, I ended up being held captive! The captors threatened harm if I didn't give them cash. I finally gave them the pin to my Citibank ATM card and they let me go thankfully. Once I returned to the hotel, I called Citibank's toll-free number to explain what happened.
Within 48 hours, Citibank credited my checking account with $2,000, the amount the kidnappers withdrew. It was then that I learned two things. One, I had a $2,000 withdrawal limit! I thought my limit was only $200. And two, having a relationship with a global bank was important.
There is one more thing I learned. Never risk your life for money! Freely give the thieves everything they ask for, especially if your funds are backed by a large financial institution. After this incident, I pledged my loyalty to Citibank.
2) The Bank For Borrowing – Save money on interest rates and fees
Banks are always looking to accumulate more deposits. Deposits are what's necessary for banks to make loans and invest to earn a profit. Ideally, deposits continue to steadily grow. If there is a bank run, the bank would be forced to sell their investments and/or somehow recall their loans to pay for withdrawals.
Wells Fargo is a bank that has gotten in trouble multiple times over the years for overcharging and opening up new accounts unbeknownst to its customers. In 2018, the U.S. Federal Reserve imposed a $1.95 trillion asset cap as punishment. CEOs John Stumpf and Tim Sloan stepped down and Wells Fargo had to pay fines.
When I called up my Citigroup mortgage banker to refinance my primary residence, he said he had moved over to Wells Fargo. Given I was loyal to the guy and the bank seemed to have turned the corner, I decided to refinance with him and get relationship pricing.
Wells Fargo had experienced an outflow of deposits due to its various malpractices, therefore, it was hungry to win back business with more competitive savings rates, CD rates, and mortgage rates. At the time, Wells Fargo offered me a 7/1 ARM at 2.625% with “no fees,” which was 0.25% lower than Citigroup offered.
3) The Bank For Investing – Better User Interface And Lower Fees
In addition to using Citibank as my operations bank to receive my paystubs, rent checks, and pay bills, I also joined Citigroup Private Client. There is actually no fee to be designated as a private client. You just needed to have over $1 million in investments.
As private clients, my wife and I were designated a financial advisor. He helped us find a bunch of structured notes to give us downside protection. This was important from 2012-2014 because I was still fearful of an economic relapse and didn't have a job, but wanted to invest. It was also nice to talk to Jeff to hear what other clients were doing.
Unfortunately, the online trading platform at Citigroup is bad. But given I'm a long-term investor who doesn't day trade, it didn't bug me too much. What did bother me was having to pay a trading fee for individual stocks when competing brokerages had lowered their commissions or cut their commissions to $0 in 4Q2019.
Given my old company's 401(k) and rollover IRA were at Fidelity, I decided to continue using Fidelity when I opened up my Solo 401(k), SEP IRA, two 529 plans, two custodial Roth IRA accounts, and two custodial taxable investment accounts.
Fidelity charges $0 per trade, has an excellent app and user interface, and is one of the largest online brokerage firms. What's more, Fidelity automatically sweeps any cash lying around into a money market account that pays a competitive rate.
Banking With Three Financial Institutions Is Good Enough
By banking with three FDIC-insured financial institutions, I personally had $750,000 of FDIC-insured accounts. When you add on my wife, then we have $1,500,000 of FDIC insurance. But in reality, I have even more FDIC insured coverage due to sweep account programs that spread your excess cash to multiple banks.
$1,500,000+ of FDIC insurance is more than enough to cover our personal and business cash balances. We have no employees and we don't like to leave any more than three months' worth of personal or business expenses in our respective accounts. We're fake retirees after all!
The FDIC insurance really is just a bonus for us, as I suspect it is for most Americans. Most Americans don't have more than $250,000 in cash or CDs sitting in one bank. Therefore, $250,000 in insurance at one bank is enough for the majority of the population.
However, banks are always competing to attract new deposits and customers. Hence, it's a good idea to take advantage of deals when they arise. Once banks have you as a client, unless you're continuously bringing in new assets, your benefits will wane. It's the same idea with job hopping.
You can't take advantage of the best terms if you stay with just one bank. Therefore, even if you don't have a lot of assets or loans, it's worth having at least two banking relationships. As you grow wealthier, having three banking relationships is ideal due to convenience, security, and getting the best terms.
And to clarify, for your online brokerage, the SIPC protects against the loss of cash and securities – such as stocks and bonds – held by customers at a financially-troubled SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash.
The Business Bank – To Separate Personal And Business
Although I just said banking with three financial institutions should be good enough to protect your personal and/or business assets, I actually bank with a fourth.
When I left my job in 2012, I finally decided to incorporate Financial Samurai and treat it as a business. There was a Chase branch close to where we lived. So we sat down with a banker one day and opened up an account and received some promotions.
I didn't go with Citibank, my operations bank, because I wanted to keep my personal and business accounts separate. Co-mingling of funds is a no-no. Separation also makes accounting and taxes easier.
Finally, if I were to ever sell Financial Samurai, having clearer books helps.
The Downside Of Having A Business Bank – Lower Interest Rates
Where banking with Chase has cost us is in its low business checking and savings interest rates. Even after the Fed aggressively raised rates and competing banks were offering 4%+ money market rates, our Chase business accounts wouldn't offer more than 0.1%.
Therefore, we were always incentivized to move money out of Chase as quickly as possible. Keeping only enough cash to fund operations is a wise business practice, especially if the business gets attacked.
But sometimes, retained earnings grow rapidly when times are good. Further, it's not wise to spend money just to spend money. Therefore, we finally opened up a short-term CD yielding 4%, which is also 0.5% to 1% lower than competing banks.
Given we don't plan to open up another business banking relationship, the 4%-yielding CD was the best we could do.
Bank With The Largest, Most Financially Sound Banks
If you want to feel the most safe, bank with the largest banks by assets. The largest four banks are JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo. It just so happens we bank with three out of the four largest financial institutions.
As of 2023, the top four banks have total assets ranging between $1.72 trillion and $3.2 trillion. If any of these banks get in trouble, the federal government will protect deposits over the insured amount. These banks are simply too big to fail for the stability of our economy.
Once you move to the 5th to 10th largest banks, the total asset amounts fall significantly. That said, it's hard to see the federal government not protecting the mid-tier banks as well in case of a bank run.
By backstopping all depositors of Silicon Valley Bank and Signature Bank, the federal government proved it would protect regional bank depositors.
Here's a more detailed chart of the largest banks in America.
Why Bank With A Smaller Regional Bank Or Credit Union?
Regional banks and credit unions tend to build better relationships with their customers. And in banking, strong relationships create stickier customers who open more accounts and bring in more customers from their network. It's nice to have a personal banker respond to your inquiries in a short time period.
In addition to building better relationships, the reason why regional banks like First Republic grew rapidly was that they made banking easier for non-traditional workers.
If you're a startup founder who is worth $30 million, but the money is illiquid given your company is private, it's hard to get a mortgage to buy a house. Traditional banks simply don't want to take the risk.
Some regional banks and credit unions are willing to take more risks in order to grow with you and your network. As you grow wealthier, you may open more accounts, become a private wealth client who pays a fee, and open up accounts for your children.
As a result, there may be far greater customer loyalty and lower churn at regional banks and credit unions.
Worth Having One Relationship With A Regional Bank Or Credit Union
No doubt larger financial institutions try to develop better relationships as well. But oftentimes, larger bank employees are constrained by stricter lending policies.
Hence, out of your three financial institutions, you may want to have a banking relationship with a regional bank or credit union. You can keep up to the FDIC limit and strategically try to get more competitively-priced loans from a regional bank.
If a regional bank or credit union goes under, you're not sweating it if you've got a big mortgage with them and have less than the FDIC-insured limit in cash.
I temporarily had a banking relationship with First Republic Bank. However, at the time I was looking to refinance a mortgage, it wasn't as competitive as Wells Fargo. Further, the bank wanted to charge me $25 if I didn't have more than $3,000 in my checking account.
Ah, one of the negatives of not having a lot of money.
Balance Out Your Assets Across Multiple Banks
Two weeks before SVB went under, I initiated the transfer of my rollover IRA from Citigroup to Fidelity. Citigroup's online investment interface didn't give me the capability of buying Treasury bonds on the secondary market and Fidelity did.
Ultimately, the online transfer failed because I needed to call Citigroup to give my authorization. What a PITA. But then the run on SVB happened the next week.
By not transferring the rollover IRA funds, I reduced my asset concentration risk at Fidelity, where my account only has a $500,000 SPIC guarantee. As a result, I felt calmer during the bank run.
After all, Charles Schwab, an online brokerage similar to Fidelity was getting hammered. Although Fidelity is larger than Charles Schwab, it is a private company that does not face a similar level of volatility.
Although nothing will likely happened to Fidelity, it's always nice to feel more at peace with your money. As you get wealthier, work to balance out your assets across your financial institutions.
The Benefits Of Concentrating Assets At One Financial Institution
If you don't want to have three banking relationships, you can also concentrate your assets at one financial institution to try and get the best terms.
Bankers are incentivized to open up as many financial accounts as possible for you to earn more money. Examples include:
- Personal loan
- Business checking and saving
The more financial accounts you open with one bank, the better they will treat you. You'll get discounts on loans, waived fees (e.g. wire transfer), and higher deposit rates. Your banker will also be more responsive to your inquiries.
Therefore, if you want to keep your finances simple and bank with one financial institution, then I'd choose the largest bank that has a neighborhood branch. This way, whenever you have an issue, you can go into the branch and talk to somebody.
Reach The Top Deposit Or Liability Threshold For The Best Terms
Alternatively, to get the best banking terms, have enough assets or a large enough loan to qualify as a top-tier client. That asset threshold to be classified in the top tier is usually $1 million or more.
For example, you can have over $1 million in your brokerage account or have a mortgage larger than $1 million and you'll qualify. Just make sure if you go the asset route, you're aware of the FDIC and SPIC insurance limits.
I like the idea of being rich enough so that you're a top-tier client at three banks. This way, you'll always have a solution to your banking needs. You can feel confident about always getting the lowest loan rates and the highest savings rate.
Finally, if you have mega-millions, then your ultimate banking relationship should be with the U.S. Treasury Department. Instead of leaving millions in cash in financial institutions, buy Treasury bills to stay liquid and safe.
Reader Questions And Suggestions
How many banking relationships do you have? What is the ideal number of banks to have? Have you ever been a client of a bank that shut down? If so, what happened to your funds?
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