Should Investors Be Worried About The Bank Crisis? (2024)

The collapse of three banks in a little under a week has threatened to pull the entire U.S. banking industry into crisis. Some investors are worrying that even a limited crisis could boil over into bigger problems for the stock market as a whole—although that outcome is far from a given.

If you’re concerned about the potential for a market crisis or worried about your investment portfolio, you’re not alone. Here are ten questions that investors might be asking themselves when contemplating the uncertainty surrounding the U.S. financial system.

What Caused the Banking Crisis?

The current banking crisis has seen the collapse of three U.S. banks. Two of them—Silvergate and Signature Bank—were closely tied to the cryptocurrency market. As crypto declined, so did the banks, until they ultimately failed.

Silicon Valley Bank’s collapse was caused by a combination that doesn’t bode well for similar institutions—a loss of deposits as customers sought out higher interest rates elsewhere, and poor returns on investments the banks were forced to sell at a loss to cover deposits.

Thankfully, regulatory authorities have stepped in to take over Silicon Valley Bank and Signature Bank, while the Federal Reserve has created a loan program that aims to backstop other vulnerable banks.

Could the Banking Crisis Cause a Recession?

There’s no shortage of people who have been predicting an imminent U.S. recession since mid 2022—yet an economic downturn still hasn’t shown up. Inflation is a big problem, but economic growth and the job market remain solid.

There are a few notable recent examples of a financial crisis sparking a recession. Just three years ago, the arrival of Covid-19 crashed the stock market and drove the U.S. economy into the shortest recession ever, although it was also one of the deepest in decades when measured by the decline in GDP.

Only time will tell whether this crisis potentially contributes to a U.S. recession. Experts say one driver of the current situation is the Federal Reserve‘s campaign of interest rate increases to tamp down inflation—and many financial analysts have been warning that tighter Fed policy itself will cause a recession.

Will There Be Another Financial Crisis?

Not every minor market calamity turns into a general financial crisis, thank goodness. A big crisis that engulfs the entire market and ruins the economy happens rarely—not that there aren’t reasons to be concerned right now.

In fact, smaller market crises happen with surprising regularity. According to research by investment bank Julius Baer, investors should expect minor market shocks like this about every three years.

These minor market commotions can and do turn into major market crises, but Julius Baer only sees that happening about once every 20 years. The last major crisis was the Great Recession of 2008, giving us about five years to go before another big one.

One important takeaway from the current mess is the importance of preparing your investment portfolio for inevitable shocks like this one. Careful asset allocation to stocks and bonds, as well as holding some safer assets, helps you weather the crises you know will be coming.

If you’re not already following a long-term investment plan, decide now how you want to control risk by spreading your bets.

Should I Sell My Stocks Right Now and Go to Cash?

The role of cash in a portfolio is to fund short-term goals and cover immediate spending needs. Sure, there’s fear in the market right now, but it’s never a good idea to sell all your assets and move entirely into cash.

Over the longer run, stocks have nearly always outperformed cash. This is due to the fact that inflation chips away at cash deposits, especially during periods like now when annual price gains are pretty high. At the same time, the stock market—as measured by the —has historically beaten inflation over time.

Each individual investor must decide for themselves what the right moves are for their portfolio. Any decisions you make should be based on your own risk tolerance and investment goals. And it’s always recommended to reach out to speak with a financial advisor.

Is It Okay to Go to Cash Inside Your IRA?

An individual retirement account (IRA) is one of your most powerful tools to secure your financial future. It may be tempting to go to cash in your IRA when it seems like the market is in trouble, but remember that time in the market beats timing the market.

If you still want to go to cash despite this warning, it’s best to keep the cash in your IRA rather than cash out your investments entirely and bury it in your backyard. To keep cash in your IRA, you’ll sell your investments but keep money in the account in your IRA’s money market option.

If you still want something physical to hold on to, call your brokerage and sign the paperwork to withdraw money from your account. Keep in mind that you’ll owe taxes and most likely penalties on what you take out.

Should I Cash Out My 401(k)?

Just like with your IRA, converting your 401(k) to cash is a bit like cutting off your nose to spite your face. You’ll miss out on tax-deferred growth if you choose to cash out, and you’ll owe taxes on the balance withdrawn. If your investments are down, you’re locking in loss when you cash out.

If you can’t resist, consider repositioning your 401(k) funds in treasury bonds or a money market mutual fund, if your plan offers those options. If you want cold, hard cash from your 401(k), your options depend on your situation.

While you can take out a loan from your 401(k) account with a current employer, this option should be reserved for true financial hardship, not to assuage your fears about market conditions.

You can make withdrawals from a previous employer’s 401(k) by contacting your plan, but if you’re under 59 ½, those withdrawals will be subject to penalties.

Where Is the Safest Place to Put Your Money During a Financial Crisis?

If the stock market scares you right now as a vehicle for storing and building your wealth, you’re not alone. This is a great time to review the best safe investments available for your money.

Some of the safest places to invest and still yield a modest return include high-yield savings accounts, certificates of deposit (CDs), bonds or even gold.

Each of these investments carry their own unique set of risks and rewards. Any decision you make about where to store your wealth should be based on your own due diligence, risk profile and investment goals.

Are My Investments FDIC Insured?

The only financial assets insured by the Federal Deposit Insurance Corp. (FDIC) are deposit accounts at member banks. That means savings accounts, checking accounts and certificates of deposit (CDs).

FDIC insurance covers up to $250,000 per depositor, per insured bank, for each account ownership category. What it does not cover are what most people generally think of as investments, even if they were purchased at an insured bank.

That list of non-insured investments includes stocks, bonds, mutual funds, crypto assets, life insurance policies, annuities, municipal securities, safe deposit boxes or their contents as well as U.S. Treasury bills, bonds and notes.

Are Money Market Funds Insured by the FDIC?

FDIC insurance covers money market deposit accounts—often referred to simply as money market accounts—but it does not cover similarly named money market mutual funds. That’s because they are mutual funds, not deposit accounts.

Like savings accounts, money market accounts earn interest. They generally offer some checking account features, but they’re typically less flexible. Banks and credit unions often limit the number of checks account owners are allowed to write or the number of money transfers you can make.

Furthermore, some financial institutions require big deposits to open a money market account. Some require hefty ongoing minimum balances.

Are Mutual Fund Balances Insured by the FDIC?

The FDIC does not insure money invested in mutual funds, even if the investment was bought from an insured bank.

The reason is that mutual funds—like annuities, stocks, bonds and U.S. Treasury securities—are not deposits, and FDIC insurance only applies to deposits.

Mutual funds are vulnerable to investment risks, including the possible loss of principal, even if you bought them from an FDIC-insured institution.