FDIC protections and limitations
November 27, 2007
There are certainly more than a few people still living who remember the Great Depression and the run on banks that took place during that time. Before the creation of the Federal Deposit Insurance Corporation (FDIC) on January 1, 1934, a run on a local bank could not only destroy the savings of an individual or family but entire communities could be destroyed. Since the creation of the FDIC not one single depositor has lost one single penny when the funds were deposited under FDIC protection.
So, why are we interested in the FDIC today? Simple: Recent bad loans in many of the nation’s largest sectors such as housing and credit, have forced banks to absorb billions of dollars in defaults. Without the protection of the FDIC, it is certain that millions of depositors would be running to their bank to withdraw their funds and that would only lead to another catastrophic collapse of the overall economy.
While much of the news concerning the economy is based in fact, much of it is also based on rumor. For instance, recently an analyst for Citigroup stated (on speculation) that the online brokerage firm E-Trade would see a run on its banking unit and that that would cause the firm to have to file for protection under the bankruptcy laws. In response, the firm E-Trade stated that the news was irresponsible and that they company was funded according to regulatory standards. In other words, they were not going under as had been speculated. Still, this news caused a temporary run on the company’s funds.
The truth is that in the US bank failures do not happen often. In fact, they are rare. There are about 8600 banks that are insured by the FDIC and of those, only two have failed this year. They were the Internet-based savings and loan NetBank and the Metropolitan Savings Bank of Pittsburgh.
When banks do fall into trouble and fail, the FDIC pays depositors quickly. Generally speaking, depositors are paid up to the insurance limit within just a few days of the bank closing. In many cases, depositors are paid the next business day. For those being paid, they can get their funds by simply opening another account at a different bank or they can get their funds in the form of a check.
With some very few exceptions, savings and checking accounts, money-market deposit accounts, and bank issued certificates of deposit are insured by the FDIC up to a limit of $100,000 per depositor, per FDIC-insured bank.
What this means is if a person has $100,000 in a savings account at one bank and he also has $100,000 in a money-market account at another bank, he will be covered for the full $200,000. However, if the two accounts were deposited with one bank, only $100,000 would be insured. This is for single named accounts.
If checking and savings are in a joint account, each account holder is insured up to $100,000.
In addition to checking and savings funds, retirement accounts are also insured when they are placed in FDIC-insured banks. These include individual retirement accounts (IRA), Simplified Employee Pension (SEP), Roth IRAs, Savings Incentive Match Plan for Employees (SIMPLE), some deferred compensation plan accounts, most self-directed defined contribution plan accounts, and self-directed Keogh plan accounts.
The limits for retirement accounts are not the same as for savings and checking accounts. Consumers should understand that retirement accounts that are held in an FDIC-insured bank can be combined. What that means is that all of a person’s retirement accounts at the same insured bank can be combined and the total is insured up to $250,000. The types of retirement accounts do not have to be the same. As long as they are allowed by law, they are covered up to the maximum limit. This is in addition to any insured non-retirement accounts at the same bank. In other words, your checking and savings are protected as well but under a different cap.
In addition to the above, certain deposits in revocable trust accounts are insured when placed in FDIC-insured banks. These trusts can be very confusing, so it is always best to check with the bank to see if your trust is covered and who is covered.
Unlike many other agencies, the FDIC receives no Congressional appropriations. The agency is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.
It is important that consumers understand that the FDIC does not cover everything. The FDIC insures deposits only. The FDIC does not insure or cover securities, mutual funds, or similar types of investments that banks and thrift institutions may offer. The FDIC does not cover or insure the contents of a safe deposit box either.
You can visit the FDIC website to learn more about what is and what is not insured by the agency. You can also visit with your bank to discuss your protection under the FDIC