Bank Runs for Product Managers

A bank run refers to a situation in which a large number of depositors withdraw their funds from a bank at the same time due to concerns about the bank's financial stability. When this happens, the bank may not have enough cash on hand to meet all the withdrawal requests, leading to a further loss of confidence among depositors and potentially causing the bank to fail.

The Federal Deposit Insurance Corporation (FDIC) is a government agency in the United States that provides deposit insurance to protect depositors in case of bank failures. FDIC insurance protects depositors by insuring deposits up to $250,000 per depositor per insured bank. This means that if a bank fails, the FDIC will reimburse depositors up to the insured limit. However, FDIC insurance only protects cash deposits and does not cover investments in stocks, bonds, mutual funds, or other financial products.

Keep in mind that the insured limit applies per company and not per employee. So, for startups that need to store their liquid reserves, money market funds might be a superior option compared to keeping their cash deposits in a bank account. Money market funds are investment products that invest in short-term debt securities, such as Treasury bills, commercial paper, and certificates of deposit. These funds are designed to provide high liquidity, low risk, and a competitive yield.

Money market funds are regulated by the Securities and Exchange Commission (SEC) and are not FDIC-insured. However, they are subject to strict regulatory requirements, such as maintaining a stable net asset value (NAV) of $1 per share. Money market funds also have a strong track record of maintaining their principal value and providing stable returns.

Compared to keeping cash in a bank account, money market funds may offer several advantages for startups. First, money market funds can provide higher yields than bank accounts, which can be beneficial for startups that want to maximize their returns on liquid reserves. Second, money market funds can offer more diversification than bank accounts, as they invest in a variety of short-term debt securities. Finally, money market funds can offer greater flexibility and access to cash than bank accounts, as they typically have lower withdrawal restrictions and fees.

One possible way to prevent a bank run from vaporizing deposits is to move spare cash into money market funds. By using money market funds, depositors can reduce their exposure to a single bank and diversify their holdings across a range of issuers. This may help mitigate the risk of a bank run wiping out their entire deposit. Furthermore, money market funds typically offer same-day liquidity, which means that investors can quickly and easily access their cash if needed.

Overall, putting spare cash into money market funds can be a way to manage risk and protect against the possibility of a bank run. It's important to note, however, that money market funds are not FDIC-insured like bank deposits, so there is still some degree of risk involved.

While FDIC insurance can protect deposited cash up to a limited amount, money market funds can offer a alternative option for startups to store their liquid reserves due to their higher yields, diversification, flexibility, and access to cash. However, it is important for startups to carefully evaluate the risks and benefits of money market funds and consult with a financial advisor before investing.

If you’re a product manager at a startup, it may be wise to ask your leadership team whether they’ve banked their spare deposits into money market funds. That way, you could lower the risk that your startup becomes entirely insolvent, which might lead to the loss of your job or the jobs of your teammates.

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