Hello everybody, it's Sam from Financial Samurai and in this episode I want to talk about the ideal number of banking relationships to feel safe and secure, but also to get the best terms. The collapse of Silicon Valley Bank and Signature Bank, as well as the almost collapse of First Republic Bank, they're getting a $30 billion deposit injection by some large institutions right now, and also the almost collapse of Credit Suisse Bank, a firm which I used to work for.

It's prudent, it's wise for all of us to review our existing banking relationships and see if we are well positioned to weather another potential bank run. This situation with the banks can go on and on and on because I would say a majority of the banks have some losses, some mark to market losses in their bond portfolio because rates went up.

If they hold to maturity, they're going to be fine. However, in the meantime, they're going to be loss making because their deposit costs have gone so far up. So if banks are forced to sell because depositors are pulling assets, they're going to have a problem. So in my opinion, the ideal number of banking relationships to have is three.

One for operations, two for borrowing, three for investing. Now obviously when you first start out, one bank is probably good enough. You're going to receive your direct deposits to that bank, you're going to write checks, all that good stuff. But as you grow wealthier and your finances get more complicated, you want to continuously shop around for the best terms out there.

So that main bank that you're banking with might not have the best borrowing rates if you want to get a personal loan or a mortgage. And that bank might not offer the best investing platform or the lowest fees or no fees. So you should shop around as well. It's the same idea as shopping around for an insurance quote, whether it's homeowners insurance or life insurance.

About every two years you should probably shop around because you'll be surprised at how much you can save by just looking at other vendors. For example, my wife thought she had the best life insurance term policy with USAA for six years until she started shopping around. Why? Because I decided to shop around because my 10-year term life insurance policy was coming to an end and I needed something new.

And once I started shopping around, I said, "Hey, check out what Policy Genius can offer you." And so she checked around and she was able to get a better life insurance policy for 20-30% cheaper. And she renewed another 20-year term lease and that was pretty good. So shop around.

At any given moment in time, financial institutions are looking to drum up business for their mortgage business or to gain more deposits. It's very fluid because money comes and goes all the time and banks, to stay competitive or to try to attract new capital, have to offer higher rates or lower fees or better terms.

And if you're just starting out on your financial independence journey or you don't have that much money, you're not going to get the best rates. You're not going to get the best CD rates, money market rates. You're not going to get the lowest mortgage rates. So you need to shop around.

And at the same time, it's not practical to have 7, 8, 10 banking relationships unless you are a centimillionaire or billionaire because it's hard to keep track of everything and you've got to file all these tax forms. The reality is, if you bank with one FDI insured bank, you're probably going to be fine if you have under $250,000 in assets.

Now the FDIC insurance is $250,000 per ownership account. So if you have a partner, there's a joint account, you got $500,000 in FDIC insurance for your cash or CD. So if you have three banking relationships, then you have at least $750,000 in FDIC insurance. Do you really need that much?

Probably not. For most Americans, individuals or households, we don't have $750,000 in money market savings or CDs. I would say less than 5%, maybe less than 2% of Americans have that much sitting around. In addition to FDIC insurance, $250,000 per ownership, there's the SIPC, which protects against the loss of cash and securities such as stocks and bonds held by a customer at a financially troubled SIPC member brokerage firm.

And basically all the big brokerage firms, Fidelity, Vanguard, Charles Schwab, they are all SIPC member brokerage firms. So you don't have to worry too much. Well, you do have to worry if you have millions and millions and billions of dollars in securities. You know, like let's say what happened with Bernie Madoff and you had $10 million with him.

You might not see that money back if there is fraud. But it's proven that most people get most if not all of their money back due to fraud. Now finally, there's also this thing called a sweep program. Now the sweep program is to help customers. It's a brokerage or a bank account that at the close of each business day automatically transfers funds that surpass or fall short of a certain threshold into a higher interest earning investment option.

And that's usually a money market fund. Maybe it's not automatic for some, but for most brokerage accounts and banks, it is automatic. And there's also the sweep program participants where the number of financial institution participants helps you gain more FDIC insurance on your cash. So when you look online and you see some brokerages say, well, we have $1 million in FDIC guarantee for you, it's because they have four banking institutions that are part of their sweep program that are offering FDIC insurance.

Little complicated, but not really. It's a evolution of the financial institutional system to protect its customers better. Now back to the ideal number of banking relationships. I say three, I actually have four because I have a relationship with another bank for my business because I want to keep my business and personal separate.

And the reality is keeping track of all these accounts is a little cumbersome. Four for me is the max. I don't know about you. I did a poll in my post and it looks like about 35% of y'all have four or five banking institutions. 23% have three, 14% have six to eight, 12% have two, only 5% of y'all have one, 2% of you have 10 plus and 1% of you have nine to 10.

So 42% of you have four to five. That sounds about right. So which three would you choose? Well, it's based on the terms really. For me, it's terms first. Can you get me the highest savings rate, the highest CD rate, or the lowest mortgage rate? If so, I'm probably going to bank with you, especially if you have a good user interface and a nice person to talk to.

But let's look at the top banks by total assets. At number one is JP Morgan Chase with about 3.2 trillion. Number two is Bank of America with 2.41 trillion. Number three is Citigroup with 1.77 trillion. And number four is Wells Fargo with about 1.72 trillion as of 2023. These are the top four banks.

They are designated as the quote too big to fail banks. They cannot fail because if one of them fails, there's going to be contagion and systemic risk across the entire economy and it'll be really bad for us. So the government basically has implicitly decided to make sure none of these banks fail.

Now, if you look at banks five to 10, their total assets drop off tremendously. At number five is US Bancorp at only 585 billion. PNC Financial Services, 552 billion. Chuist Bank, 546 billion. Goldman Sachs at 486 billion. Number nine, Capital One at 453 billion. And number 10, TD Group US Holdings, 386 billion.

I doubt these banks will fail either. But if you're going to go with a bigger bank, you might as well at least have one or two of your three banks as one of the biggest banks if you want to sleep well at night. Well, what about a regional bank like First Republic Bank and Silicon Valley Bank?

Well, clearly, these banks are being targeted for withdrawals, which is why their share prices are getting crushed. But if you have less than $250,000 with each bank, or if you have a huge loan with these banks, you shouldn't really be worried. A lot of people go with regional banks due to the relationships.

You have people who you can call or who will text you back or respond to you over email within 30 minutes, an hour. You know, this type of service is really valuable to some people, especially to higher net worth individuals. However, if you have mega millions, well, you probably need to diversify away from regional banks.

You can have your account there, but I wouldn't make it the main banking account. I would certainly try to balance out how many assets you have with each of your banking relationships. Don't have one bank with 80, 90% of the assets and the other two banks with 10%, 10%.

I would think, I think it's smart to go, you know, 33%, 33%, 33%. Obviously, you're never going to get it exactly right. But to spread that risk around. Another strategy worth deploying is to borrow more heavily from a regional bank, a smaller bank that might be more at risk, but who is giving you much better terms, much lower mortgage rates, borrowing rates, and then invest with the larger banks and have more of your capital, your cash with the largest too big to fail banks.

Every single banker wants as many accounts open with you as possible. The more accounts they have, the better they get paid, the more they can make money. As you develop more wealth, accumulate more wealth with one bank, your terms will get better. Their customer service is going to get better.

They're going to be more responsive to your needs. And that's a great thing. However, you have to be aware of the insurance levels and the solvency of the bank. If you stick with the top banks, you're probably never going to encounter a problem. So one strategy you should think about as you get wealthier is to concentrate your assets in one finance institution so you can get the best service.

You have to understand what that tier service entails. So there might be three tiers at a bank where if you have 250,000, you're at tier three, 500,000 to 1 million, you're at tier two, and then at 1 million or greater in assets or in borrowing, you're at tier one and you get the best terms.

So if three banks is the ideal number of banking relationships to have, and 1 million is generally the threshold to get the best terms, tier one terms, then your goal should be to have about 3 million or more spread across three banks equally. Actually, it doesn't have to be 3 million in assets.

It could be a $1 million plus mortgage at a regional bank or smaller bank that has the best terms for borrowing costs, and then you can spread out 1 million to a large bank and another million to another large bank with good user interface, no trading commissions, and a great plethora of research and available securities to purchase.

Now let's say you are very wealthy, very fortunate, and you have over 10 million investable assets, 50 million, 100 million, a billion. What is the right strategy? Well, you can still stick with three banks or maybe four banks, but instead of just holding your money in cash, you should buy US Treasury bonds.

US Treasury bonds or bills are very liquid, and they yield greater amounts than your money market funds. So you can buy an unlimited amount of US Treasury bonds, and therefore the US Treasury Department is your banker. And the US Treasury Department isn't going to go bankrupt because it is the system.

It is the guarantor of last resorts. It is the one who can print unlimited amount of funds. So that's what you should do. Oh, and it's funny. After I had finished playing tennis, a billionaire was up next. I've known him for over a decade, and he's probably worth $2.5 to $3 billion.

Very successful investor. You might have seen him run for president one day. Anyway, so I asked him, "What do you do with your cash in light of the situation?" And he said, "Well, it's obvious. I own assets. My assets that can't be taken away. And also, I own a lot of Treasury bonds." So there you have it.

Someone who has way more than 99.9999% of us owns assets, real assets, and buys Treasury bonds. Now, let's just go back to the majority of people who don't have that type of money. And let's say you just have $50,000 to $100,000. Should you still have three banking relationships? Well, you should obviously still have one.

You should have a minimum of two, I think, for optimization purposes. If you want to get a loan, if you want to get the higher rates. Two, because when you have two, you have competing bankers or banks who want your assets. So when you have competition, well, people are going to offer you better terms.

So if your assets are well under $250,000, I say have at least two banking relationships. You never know when one bank might stop giving you that line of credit or cut off that personal loan. And it's nice to have more access to more branches and more ATMs as well.

All right, folks, let's all hang in there. It seems like all the governments around the world, all the regulators are on the same page and they don't want any bank to fail. The silver lining from all these bank runs is that the Federal Reserve might be a little softer when it comes time to hike again or a little quicker when it comes time to pause or to cut.

Although the ECB did raise rates surprisingly on the morning of March 16th by 50 basis points saying inflation is still too high. We got to get that under control. So I expect the Federal Reserve to hike one more time, another 25 basis points, get to 5% on the Fed funds rate, and that's it.

The more important point is going to be the language that Jerome Powell tells the world. He needs to sound confident, calm and aware. If he can do those three things, I think the market is going to like that, which also means I don't think we're going to get back to the recent lows of $3,597 on the S&P 500.

If we get below $3,800, I'm going to be buying again. Probably going to be nibbling again. I'm still filling out my kids 529 plans respectively. I'm about 60% of the way there for this year for each. So just bit by bit, dollar cost averaging a little by little. I'm still happy with my treasury bonds yielding 5% as we wait for the storm to end.

And there is a scenario by mid this year, mid 2023, we could feel a lot of reprieve because we know the Fed hike cycle, the rate hike cycle has ended. And there's only upside in terms of downside with the Fed funds rate. And given the stock market looks six to 12 months ahead, we do have hope.

So I would say keep the hope alive. And if you're looking to buy real estate over the next three to six months, I think is a really opportune time. The focus really is going to return to real assets that hold their value better, that are less volatile, that produce income and that provide utility.

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