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Thursday, September 28, 2023

3 ways the banking crisis could change the way you bank

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According to a recent J.D. Power survey, 34 percent of consumers who are aware of the recent bank failures of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank are feeling “very concerned” about the security of their funds in banks. This has resulted in many consumers feeling nervous about the current state of the U.S. banking system.

A savings account at a federally insured bank is still a secure and convenient way to store your money, despite concerns from consumers. As long as your bank is insured by the Federal Deposit Insurance Corporation (FDIC) and you follow their guidelines, your money is safe. However, it’s important to be aware that the recent banking crisis may lead to changes in the way you bank.

In this article, we will explore three potential scenarios for how banks may adapt in response to the banking crisis expected in 2023.

1. Smaller banks may increase yields

Please note that smaller and midsize banks and credit unions may be offering higher annual percentage yields (APYs) on high-yield savings accounts in response to the banking crisis. These banks suffered significant losses after the failures of SVB, Signature, and First Republic as customers withdrew their deposits and moved to larger banks for perceived safety.

One way that smaller banks may try to keep their current customers and attract new ones is by raising the APYs on their savings accounts, money market accounts, and CDs.

2. Banks could increase their fees

Federal regulators seized Silicon Valley Bank and Signature Bank. They decided to cover not only insured deposits but also a significant portion of uninsured deposits.

The FDIC insures up to $250,000 for each bank account owned by an individual at each FDIC-insured bank. This means that you can ensure the safety of your funds as long as they fall within those limits and requirements.

If the FDIC starts offering unlimited insurance coverage to all depositors due to the banking crisis, banks may end up paying higher insurance premiums. To cover these increased costs, the banks may raise the fees charged to depositors.

3. Banks are tightening lending practices

According to an interview with U.S. Treasury Secretary Janet Yellen on CNN on April 14, in response to recent bank failures, banks are likely to make their lending practices stricter.

Due to the need to maintain a healthier balance sheet, banks might increase interest rates on loans, making it harder for people to purchase cars or fund home improvement projects.

Actually, banks had started reducing credit even before the bank failures in March. In the third quarter of 2022, a survey by the Federal Reserve of top loan officers in banks revealed that lenders had tightened credit access for both individuals and businesses.

According to the survey, if a recession were to occur, 80 percent of banks would tighten their lending standards for credit card loans, either substantially or somewhat. Additionally, 74 percent of banks would tighten their lending standards for auto loans substantially or somewhat.

Regional banks are known for their close relationship with their customers, as they are usually based in the communities they serve. As a result, they may consider factors like family history and non-essential spending habits when approving loans and considering credit scores. However, this personalized approach, known as “relationship banking,” may be jeopardized if larger banks acquire smaller ones.

Bottom line

It is uncertain if there will be additional bank failures soon, but as long as consumers’ funds are within the insurance guidelines and limits at a federally insured bank or credit union, they can be confident that their funds are secure.

As a consequence of the banking crisis, some positive changes like increased yields on deposit accounts may occur, but there may also be negative effects such as higher fees and loan rates. To navigate these changes, it is recommended to search for savings accounts with the highest yields, avoid unnecessary bank fees, and compare loan terms before borrowing money.

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