Banks Going Out of Business?

open door to safe

Here’s a good question:

What happens if I have my mutual funds and investments with a bank and the bank goes bankrupt?  (JP Morgan Chase, BofA, Merrill Lynch, etc.)

I’ve had several people express this concern to me over the past couple weeks- so let’s take a look.

Whenever you buy a stock or bond or mutual fund, that investment has to be “held” somewhere.  Back in the good old days, many people would actually hold stock certificates inside a safe in their house.

Nowadays, with modern technology, stocks and bonds are held electronically at a “custodian.”  A custodian is simply a financial institution that holds your investments.

So what happens if the custodian goes bankrupt?  First of all, this is an extremely rare occurrence.  In 2008, when Lehman Brothers went bankrupt, JP Morgan Chase purchased them and took over the custodial responsibilities.  Not a single account holder lost a penny due to the bankruptcy of the custodian.  It simply meant was that JP Morgan Chase started to hold the stocks and bonds instead of Lehman Brothers.

But what you really need to know is the following:  whoever is holding your investments has no financial claim to your money.  Your assets are held separately from the bank’s assets.

For most of you who work with me, you know that we employ the Bank of NY Mellon.  This particular bank holds 1.5 trillion dollars in client assets.  The part of the bank that acts as a custodian is called “Pershing, LLC.”

So if the Bank of NY Mellon comes out tomorrow and says they are going bankrupt, what happens to your money?!

Let me answer that question, by asking another question.  Let’s say you purchase 100 shares of Disney stock, and you request the actual paper stock certificates, and you put those certificates in a safety deposit box at a local bank.   If that bank went bankrupt, would you lose your stock certificates?

Absolutely not.  You would go to the now-bankrupt bank, open up your safety deposit box, and take your stock certificates.

The same thing applies to you and your investments now.

There are actually several additional layers of safeguards for consumers, including SIPC insurance, but at the end of the day, you really have nothing to worry about. (click here for more technical info)

So if you are concerned about the bank holding your investments.  Please stop.  There is nothing to worry about.

Be Blessed,

Dave

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