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FDIC Insurance
covers deposit
accounts, dollar for dollar, including principal and any accrued interest,
up to the insurance limit. FDIC is funded by premiums paid by financial
institutions and in 2007 had $51 billion covering $3 trillion of insured deposits.
Historically, insured funds are available to depositors within days after
the closing of an insured bank. Since the start of the FDIC in 1934, no
depositor has ever lost a penny of insured deposits.
The FDIC web site is www.fdic.gov |
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What Does FDIC
Cover?
Let’s begin by
saying what FDIC does not cover. FDIC does not cover money placed in
stocks, bonds, mutual funds, life insurance, annuities, U.S. Treasury
obligations, or uninsured bank deposits. FDIC
does cover up to $250,000 in deposits for one
owner at one insured bank, but there are different categories of owners
that may allow one to increase coverage.
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Permanent
Increase In FDIC Coverage to $250,000
The Dodd-Frank Wall Street Reform
and Consumer Protection Act signed by the President 21 July 2010, raised
the standard maximum deposit insurance amount to $250,000. This makes
permanent the temporary increase that was to expire 31 December 2013.
The FDIC insurance coverage limit applies per depositor, per insured
depository institution for each account ownership category.. This means if
the combined checking, savings, money market accounts and CDs for a
single owner at one bank total $250,000 or less all deposits are
insured; joint accounts would be covered for up to $500,000 (IRAs
were already protected up to $250,000). The FDIC coverage is per
bank, meaning if one owner has $250,000 deposited at ten different
banks all deposits would be covered. Naturally, people should talk
to their banker to ensure they are fully insured in their own
situation.
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Single Accounts
Accounts owned by one person and titled only in that person’s name are single
accounts. If Jack has a checking account, savings account and a CD at the same
bank titled only in his name, all of these accounts are added together and
insured up to $250,000.
What if Jack had
$100,000 in his checking account and another $200,000 in CDs at the bank?
Assuming both accounts were owned and titled by only Jack,
$50,000 of
the total would be uninsured deposits because the total ($300,000) is $50,000
over the $250,000 FDIC insurance limit.
What if Jack had
$100,000 in his checking account at one bank and $200,000 in CDs at another bank?
Both accounts are covered because FDIC provides $250,000 of coverage for
each bank.
What if Jack had
$100,000 in his checking account and another $200,000 in his IRA at the bank?
Both accounts are covered because Self-Directed Retirement Accounts
(IRAs and SEPs) are treated as separate titled accounts and FDIC provides
$250,000 of coverage for Jack's checking account and $250,000 for Jack's IRA.
What if Jack had
$100,000 in an old IRA
and
another $100,000 in a SEP at the same
bank?
It appears both would be covered because both are IRAs and the total is less
than $250,000.
Joint Accounts
Each person’s share of each joint account, with the same or different
co-owners at the same insured bank, is added together and the total is insured
up to $250,000. If Jack and Carol had $200,000 in their joint checking account
and $200,000 in joint owned and titled CDs, all at one bank, all $400,000 would
be insured because the total of their individual shares was not greater then
$500,000.
Revocable Trust Accounts
There can either be payable-on-death (POD) accounts or estate planning
trusts (living trust, family trusts) whereby, if certain conditions are met, the
accounts are insured up to $100,000 for each owner for each qualifying
beneficiary. Qualifying beneficiaries are the owner’s spouse and (either
natural or adopted or step) child, grandchild, parent, sibling.
Note: There are different ways to maximize FDIC coverage and the place to
ask questions is at the bank. This summary is only for educational purposes and
is not intended as legal advice.
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Insuring More Than $250,000
FDIC coverage is limited to $250,000 at each bank per named
single nonqualified account. So, typically an individual with $1 million in CDs would
either need to go insurance-naked on $750,000 or open accounts at four
different banks. But now ONE bank account can provide FDIC coverage
on the whole million if the bank uses CDARS.
The Certificate of Deposit Account
Registry Service, or CDARS, uses a network of banks across the country to
provide the additional FDIC coverage needed.
How does it work?
The way it works is every dollar over the $250,000 coverage limit
is placed in another bank and that bank deposits an equal amount of money
in the first bank. So, if a consumer had $300,000 the first bank might
retain $240,000 (to keep under the $250,000 limit after earning next year's
interest) and put the remaining $60,000 in the second bank. Since the
consumer now has less than $250,000 at each bank the entire $300,000 is
FDIC insured. The second bank would then deposit $60,000 from a different
customer's account back to the first bank to balance up the books. If the consumer
had $600,000 three banks would be used, and that individual with $1
million would have their money on deposit at five different
banks.
But all of this is done behind the curtain. What the depositor
sees is one account at their bank with one account number and the
depositor gets one Form 1099-INT for interest at tax time. Using CDARS as
much as $50 million can be covered.
Who is CDARS?
The program is managed by Promontory
Interfinancial Network, LLC. [1515 North Courthouse Road, Suite 800,
Arlington,VA 22201, 866-776-6426]. Although they have only been around a
few years they boast a heavyweight board and management team that includes
as their CEO former Comptroller of the Currency Eugene Ludwig.
What's the catch?
The catch is the bank will take a little more off the yield paid to the
consumer to cover the extra costs of the CDARS program. However, because
of the national network of over 600 banks used the consumer could still
wind up earning more with CDARS than if they left all the money in their
local bank.
Another point is CDARS network banks tend to be small or medium sized
financial institutions, the vast majority of the banks are not affiliated.
But it might get your banker's attention if you threaten to withdraw your
"mega CD" unless they provide CDARS.
CDARS had been endorsed by American Bankers Association. More information is
available at their web site www.cdars.com
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If The Bank Fails
The bank customer will usually find out
their bank failed when they get a letter stating that another bank has taken over the
accounts. FDIC does not give advance notice to the public when a financial
institution is closed. If all of the accounts are fully FDIC insured the bank
customer loses nothing and access to all money is usually immediate. If you have
uninsured deposits, life is more difficult.
When a bank fails and FDIC is appointed
as receiver, FDIC will sell the institution’s assets to pay depositors and creditors. If any excess
cash is generated – after the administrative expenses of the FDIC receiver are
taken care of – then the receiver may declare and distribute a dividend to
claimants. First in line to claim any money are the remaining uninsured
deposits, followed by institution liabilities, subordinated obligations, and
then obligations to shareholders.
When Do Uninsured Depositors Get Paid?
Uninsured depositors may get a special Advance
Dividend usually within 30 days after the bank closes. Every quarter
FDIC, as the receiver, will determine the net proceeds available from converting
failed bank assets and, if money’s available, pay out a Traditional
Dividend until all the money’s gone.
Have Uninsured Depositors Always
Received All Their Money Back?
No. For example, from 2001 through 2004
22 banks were taken over by FDIC and four of these banks failed to return 100
cents on the dollar on uninsured accounts when the final dividend was paid.
Could you be more specific?
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Failed Bank
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Date Closed
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Total
Uninsured Deposits Repaid |
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Bank of Sierra Blanca
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18 January 2002
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65.35%
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Sinclair National Bank
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7 September
2001
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82.17%
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The Malta National Bank
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3 May 2001
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91.21%
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First Alliance Bank & Trust
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2
February 2001
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94.99%
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The remaining eighteen banks that went
under had returned, by the spring of 2005, anywhere between 30% and 98% of uninsured
deposits, but they are still in receivership and could return more (but it could
take years). List Of Banks In Receivership
So, How Safe Is My Money?
There are thousands of FDIC insured
financial institutions out there. In 70 years no depositor has ever lost a penny
of insured deposits. In our opinion the credit risk of an FDIC insured account
is for all practical purposes the same as that of a direct U.S. government
obligation.
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Although some banks
fail 99% of them do not |
If one is over the insurance limit,
there are ways to change ownership to increase FDIC account coverage. An FDIC
insured bank account is a safe money place. If you have uninsured deposits the
risk of losing them due to a bank failure are very slim. A few banks fail every
year, but 99% of them do not. However, if you have uninsured deposits it would
probably be a good idea to find out what the private rating agencies are saying
about your bank.
How Strong Is The Bank?
Although FDIC does evaluate the
financial strength of the banks they are insuring, the FDIC never releases its ratings on the safety and
soundness of banks and thrift institutions to the public. However, there are
several private services that do provide a letter or number grade designed to
rate institutional financial strength.
BauerFinancial,
Inc.
www.bauerfinancial.com
800-388-6686
Method: Ratings are based on a
5-star scale (5-stars being the highest and 0-stars the lowest)
Highline
Financial
www.highlineFI.com
877-305-6656
Method: Rates banks on a scale
of 99 (best) to 0. Ratings are based on financial statistics and
comparisons to peer institutions.
IDC Financial
Publishing
www.idcfp.com
800-525-5457
Method: Rates institutions on a
scale of 300 (best) to 1, based on financial statistics and ratios. IDC
calculates over 35 key financial ratios and provides a one number summary
rating. Reports also include one line summaries of financial statistics and
ratios for each institution and peer group distributions.
LACE Financial
Corp.
www.lacefinancial.com
301-662-1011
Method:
Institutions are assigned ratings from A+ (best) to E, based on ratios
representing liquidity, asset quality, capital, and earnings.
Veribanc
www.veribanc.com
800-837-4226
Method: Ratings consist of a green, yellow, or red code and three (high)
to zero stars. Blue Ribbon represents a special commendation for excellence.
Ratings are based on actuarial studies of bank failures and is not a peer group
comparisons.
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Safe Money Places®