Asset Alloc | Wise Citizen

Banks and Credit Unions

Diversification & Safety Strategy

Consider keeping your funds in more than one bank, Credit Union or brokerage to reduce the chance of disruption in case of account hacking or institutional insolvency. Distribute cash across institutions to provide more than one avenue in case of financial problems. It is less likely that your institutions will have simultaneous / concurrent problems.

Bank & Credit Union Accounts

Have a separate "Direct Deposit" account for payors to deposit your paycheck / pension / social security
Have a separate checking account to do bill payment / write checks, and electronically transfer your deposits to checking to avoid your direct deposit account from being stolen or compromised.
Since your Debit card is usually attached to your checking account, recommend you limit use of your debit cards except for cash machine/deposit access. If hacked, the hacker gains immediate access to your balance and may cause havoc.
Protect your Debit Card: Do not give 3rd parties your debit card for automatic payments (like cell phone or other recurrent bills).
Skimmers: Are devices hackers place in Cash Machines to skim your account information and PIN. If you experience ANY odd behavior with the cash machine, call the number on your Debit card and ask for help.

We recommend you do not deploy multiple account strategies if you are elderly and you find this advice confusing or difficult to understand or manage.

Bank / Credit Union Deposits

Rather than parking all your money in the bank, and subject it to FDIC / NCUA limits and lower interest rates, further diversify your savings/holdings by buying Treasury Bills directly from the US Treasury using the Treasury Direct program. You can buy and hold your cash directly in government debt and keep these funds out of the This topic will be discussed in detail elsewhere.

Banks

There are many types of banks focusing on different market sectors and locations. Investment banks (Goldman Sachs), Commercial Banks (business focused), National Banks (Bank of America) and Local/Regional banks.

Fun Facts

When you deposit money into a bank you become a general creditor of the bank. In other words, your deposit is actually loaning money to the bank. The unstated assumption is the bank will return your loan, which is what happens when you write a check or visit a cash machine.
Banks then take your deposited out money and loan it to others at interest. Example: you deposit $10,000. Because the banks use fractional reserve banking, only a small portion of your original deposit (0-10%) remains in the bank for liquidity in case you want to withdraw your money. At 10% reserves, the bank can then loan out $90,000 to other banking customers. $9000 from you, and 81,000 they create out of thin air via a ledger entry. What a nifty trick! They create money out of nothing and loan it at interest, while paying you a paltry amount of interest on your checking/savings.
The FDIC insures customer 'deposits' up to $250,000 in the case the bank becomes insolvent (bankrupt). As long as only a few banks are insolvent simultaneously, this isn't a problem, as the FDIC has cash available for depositors. As of Q1-24, there is $125 billion in the fund.
In 2008 this wasn't the case. Too many banks / large institutions went bankrupt, so Congress extended the "line of credit" for the FDIC as the FDIC "reserves" were inadequate. $700 billion - considered a huge amount in 2008, was voted by congress to keep Citi, Bank of America and other companies solvent. Note here an act of Congress was required and taxpayers backstopped these companies.
The 2010 Dodd Frank bill requires depositors of $250k to "bail-in" the bank, rather than .gov/taxpayers paying to rescue the institution. So if you hold $1m in an account, you could lose $750k of your deposit. The bank gives you stock worth $750k for your trouble; the problem is bankrupt banks stock value is usually zero or close to zero.

Businesses should make sure they understand coverage limitations for amounts > $250,000 !!

Without the backing of the US .gov, the banking system could have completely collapsed in 2008. Post Dodd-Frank (2010) Congress said they would not bail out the banks. However, in the 2023 bail out of Silicon Valley bank the FDIC made a decision to extend coverage.

The key question, and our risk to manage as depositors, is whether or not Congress will have the funds or political will to bail out the FDIC and its companion NCUA (see Credit Unions) in the next recession.

Some context for you to consider:

In 2008 US Debt was $10 trillion
in 2024 US Debt is > $35 trillion - AND increasing at $1 trillion every 90 days. The US is going into debt $8.5 billion every day.
The FDIC's $125 billion is not nearly adequate to cover a banking crisis
FDIC relies on the "good faith and credit" of the US Government, which seems unable to control its spending.
The US banking system has notional derivative contracts of $206.1 trillion (as of 3/31/24) with the 4 largest banks holding 87.6% of those contracts. Goldman Sachs, JP Morgan Chase, Citibank and Bank of America, followed by Wells Fargo ($14T), Key bank (#20, 134b), Umpqua (#57), Charles Schwab (#66, $7b), Washington Federal (WAFD - #75, 5.9b)

Credit Unions

Credit unions are different from banks and require customers to become a CU member/owner. Credit Unions are not-for-profit financial cooperative and may be organized as a Federal Credit Union, or may be chartered under State Law.

Fun Facts

Like banks, Credit Unions are allowed to utilize fractional banking (see Banks) and generate loans.
Federal Credit Unions have deposit insurance provided by the NCUA and member shared are insured up to $250,000. Corporation insurance may be aggregated to the $250,000 maximum across multiple accounts. See Link.
As of 3/31/24, the NCUA fund has $21.2 billion in reserve. Total credit union assets insured are $2.3 trillion.
The link to the Credit Union Performance site allows you to look up Credit Union fiscal health. If you are a credit union member try using this site to check the overall financial strength of the CU.