This past week, I have had two clients sell their homes and realize, in both cases, over $200k in proceeds that they will put down on their next house. To have to put that money in 3 different banks in this day and age is impractical and silly.

Real estate investors who buy and rehab houses, even in a small market where homes cost $100,000, need 100k in liquidity if they do any real business. In the NY area, a $250k ceiling (where a $1,000,000 vulture fund is common for these types of investors) is really just a good start. 10 bank accounts is also impractical and silly.

Not your best post but you remain a gentleman and scholar.

If not kept in one account, what are the rules about splitting them into more?

I'm just curious. (and not a lawyer)

[Kip replies: The info you cite: (1) does not apply to all depositors, (2) is available via the FDIC link I provided, and (3) is utterly irrelevant to my theses. So spare me the infantile "I'm a bank teller and know more than you do" lectures.]

Having been involved in a business that simply had to keep sums larger than $100,000 in the bank, I can say that this is incorrect.

A lot of times in the case of a small business, your cash situation is extremely fluid. If you bill your customers on a net 30 basis (as many businesses must do) but must pay your vendors on terms ranging from "on receipt" to "net 180", you will almost always have a situation where $ in bank < accounts payable < accounts receivable. This results in a situation where you will frequently have large sums of money in your account for a few days or weeks, only to have those sums dramatically reduced on the day(s) you pay your bills.

A business of, say, 20 employees making an average of just 30K per year will owe $50,000 a month just to make payroll. Then factor in rent, cost of goods sold, marketing expenses, shipping expenses, etc. It's fairly typical for a small business of that size to owe about $200-$300K per month in bills. Which means that you have to have more than that amount flowing through your account over the course of the month. Also because of the fluidity of your cash situation, it would be completely unmanageable (especially for a small business) to spread your deposits amongst multiple banks.

Of course, businesses can also be highly seasonal, with the bulk of receipts coming in all at once, but with bills relatively evenly spread out – in which case, you will have a significant period of time where you need to hold a particularly large sum of $ in your account.

As for being more selective about bank stability, it's not really that simple since in many areas there are relatively few banks to choose from. Add to that the fact that usually a bank is secure when a business starts using it; if the bank starts to become insecure and businesses start pulling their accounts and moving to other banks, that is the definition of a bank run, which means a good number of businesses are going to be left holding the bag, unable to meet payroll or pay their bills through no real fault of their own.

Assuming that no depositors hold more than $100K in any single bank even though some could, it provides the opportunity for banks to receive more capital from depositors. At a time when some banks are teetering on the brink of insolvency due to investments in sub-prime mortgage securities and many other banks are scared to lend to anyone, the theory is that the infusion of capital from depositors will provide a cushion that might help unlock the credit markets.

That's the theory, at least.