Everyone is hopeful that the recent turmoil in both the U.S. and foreign markets is receding. Nevertheless, it is a good time to review coverage by the U.S.’s Federal Deposit Insurance Corporation (FDIC) and international deposit insurance protection, as well as various strategies to maximize deposit protection. In particular, account holders with deposits over deposit insurance limits should review their exposure and take steps to ensure risk levels with which they are comfortable.
I. The FDIC’s Deposit Insurance Coverage
The FDIC is a U.S. government corporation that provides deposit insurance which guarantees the safety of deposits in participating financial institutions (“bank” or “banks”). The FDIC does not charge account holders for this deposit insurance coverage. FDIC insurance covers funds in deposit accounts, including checking and savings accounts, money market deposit accounts, and certificates of deposit. However, FDIC insurance does not cover stocks, bonds, mutual fund shares, life insurance policies, annuities, or municipal securities.
On October 3, 2008, U.S. legislation increased the FDIC’s deposit insurance coverage limits. The basic coverage limits are as follows:
These limits refer to the total of all deposits that an account holder has at each FDIC insured bank. Consequently, if a corporation has five accounts at one FDIC-insured bank, and each account holds a $100,000 balance, the corporation is only insured by the FDIC for $250,000 of its $500,000 deposit total. The above coverage limits apply only to interest bearing accounts. As for non-interest bearing accounts, the FDIC fully insures such accounts for their entire amount.
Prior to October 3, 2008, the FDIC’s coverage limits for the above categories stood at $100,000. In response to the current economic downturn, U.S. legislation increased the limits to the amounts shown above. This legislation authorizing the increase in coverage limits is only effective through December 31, 2009. The unlimited insurance for non-interest bearing accounts only remains in effect until December 31, 2009 as well.
II. Foreign Deposit Insurers
Aside from the U.S., over 100 countries have their own deposit insurance systems. Some systems operate similarly to the FDIC, while others take alternative approaches. The Deposit Insurance Corporation of Japan (DICJ), for example, is Japan’s primary deposit insurance system. Like the FDIC, the DICJ insures depositors, free of charge, at participating banks. The DICJ has coverage limits as well: ¥ 10 million (plus interest) per account.
III. What Bank Depositors Can Do
a. Ensure Banks Are FDIC Insured
U.S. banks are not all FDIC insured. As such, it is important for all account holders to confirm that their banks afford FDIC protection. Fortunately, such confirmation is easy. Insured banks must hold an active FDIC certificate number and must display an official sign at each teller window or station where deposits are regularly received verifying FDIC coverage.
b. Confirm Status of Accounts Held in Separately Insured Banks
In the banking industry, it is common for a bank to have numerous branches, offices, affiliates, divisions, etc. Unfortunately, under the FDIC, a depositor cannot increase insurance coverage by placing deposits at different branches or affiliates of the same insured bank. Accordingly, it is crucial to understand the relationships between affiliated banks to ensure FDIC protection is not wrongfully presumed. The rule stands as follows: If two banks are affiliated but are separately chartered with the FDIC, deposits in each bank are separately insured up to $250,000. To determine whether two banks are separately chartered, an account holder needs each bank’s FDIC Certificate number. If these numbers are different, each bank is separately insured. For more information on any bank’s FDIC status, consult the FDIC’s Institution Directory at http://www2.fdic.gov/idasp/. If information sought is not accessible via the FDIC Institution Directory, the depositor can directly consult the bank in question.
c. Beware of Bank Mergers, Acquisitions, Buy-Outs, and the Like
Over the past few months, the U.S. economy’s woes have profoundly impacted the banking industry’s composition. Recently, Wells Fargo Bank purchased Wachovia Bank at a competitive price due the latter nearing insolvency. With Wachovia taken over by Wells Fargo, the question arises: If a corporation has an account at Wells Fargo with a balance of $250,000 and an account at Wachovia for $250,000, how much of that $500,000 dollars remains FDIC insured after the buy-out?
The FDIC provides an amenable answer. When two banks merge, the FDIC provides coverage for each account for six months after the merger. After the six months, depositors need to move some of their money to an unaffiliated bank to maintain full protection.
As discussed, the FDIC provides significant protection to accountholders. Nonetheless, account holders with deposits exceeding FDIC coverage limits should take the time to review their accounts for possible exposure, which can often be reduced or avoided by researching the banks in which one’s money is deposited, transferring or opening separately insured accounts, monitoring deposit insurance legislation, and keeping current on banking mergers, buy-outs, acquisitions, and related news. Moreover, if a bank is protected by a foreign deposit insurer, these same steps can be taken to maximum protection abroad.