Written by Rob Williams, Director of Income Planning, Schwab Center for Financial Research, March 16, 2009.
Although bank failures have been relatively rare historically, it’s prudent to evaluate the steps you can take to protect the assets you have in the banking system. Steering depositors away from panic and instilling public confidence in the banking system were reasons why Congress created the FDIC in 1933 as an independent agency of the United States.
The FDIC insures deposits at nearly 8,500 banks and savings associations and is backed by the full faith and credit of the U.S. government. When a bank fails (which has happened more than 150 times over the last 15 years), depositors can take comfort in knowing the FDIC is required to make them whole on their insured balances as soon as possible. Based on its previous track record, the FDIC has typically made insured deposits available within a few days after a bank closing. As of the end of 2008, the FDIC insurance fund had $18.9 billion in funds on hand, down from $45 billion in June 2008. Still, the FDIC has a long-standing $30 billion line of credit to the U.S. Treasury, and has recently requested more. Historically, the FDIC relies on bank assessments, but has access to these additional funds if required.
Given these protections, the most important takeaway for bank depositors is to maximize the amount of their balances that fall under the FDIC insurance safety blanket. With a little planning, depositors can greatly increase their insured amounts and significantly reduce their exposure to loss should their banks fail.
Here are a few ideas to help you get started:
Make deposits at FDIC-insured banks. The FDIC logo should be plainly displayed on their website and in their branches. Make sure you understand the rules of insurance coverage. The FDIC aggregates each customer’s deposits, such as checking accounts, savings accounts and certificates of deposit (CDs), into several “ownership categories” that each receives separate FDIC insurance coverage.
Understanding and taking advantage of these ownership categories is the primary way for depositors to maximize their FDIC-insured balances.
- Insurance Limit Single accounts $100,000 ($250,000 until December 31, 2009) per depositor across all accounts of the same category. Includes sole proprietorship accounts.
- Joint accounts $100,000 ($250,000 until December 31, 2009) per owner across all accounts.
- Certain retirement accounts $250,000 per owner, excluding Coverdell education savings, health savings and medical savings accounts.
- Revocable trust accounts $100,000 ($250,000 until December 31, 2009) per beneficiary per owner. Includes both formal and informal revocable trust accounts.
- Irrevocable trust accounts $100,000 ($250,000 until December 31, 2009) per trust when trust has contingencies.
- Employee benefit plan accounts Up to $100,000 ($250,000 until December 31, 2009) for each participant’s noncontingent interest in the plan.
- Corporation, partnership and unincorporated association accounts $100,000 ($250,000 until December 31, 2009) per incorporated entity, partnership, or unincorporated association.
- Government accounts $100,000 ($250,000 until December 31, 2009) per official custodian of the government entities.
- Demand deposits are separately insured from savings deposits.
Make the most of the first four ownership categories listed above (the most common categories) to maximize coverage. As an example, with careful planning and the enactment of the Emergency Economic Stabilization Act of 2008, a married couple can have $3 million of FDIC coverage.
Here’s an example of account titling and coverage:
- Wife’s individual savings accounts, checking accounts and CDs $250,000
- Husband’s individual savings accounts, checking accounts and CDs $250,000
- Husband and wife joint checking accounts, savings accounts and CDs $500,000
- Husband’s retirement account (IRA) $250,000
- Wife’s retirement account (IRA) $250,000
- Husband and wife’s living trust account naming three children as beneficiaries $1,500,000
- Total $3,000,000
- Note 1: When purchasing CDs through a brokerage account, make sure to stay under the $250,000 insurable limit with any single issuing bank, and don’t forget to consider any other deposits you may have with an issuing bank (e.g., if you already have deposits totaling $250,000 with a bank, don’t purchase CDs from the same bank in the same ownership category).
Keep in mind that if you purchase a CD with a maturity date after December 31, 2009, the insurance amount is scheduled to revert back to $100,000. An extension of these time limits has been discussed by Congress, so keep an eye on the latest news.
A lesser-known ownership type is the payable-on-death (POD) account, a type of informal revocable trust. Using this type of account can increase your total insurable amount because the coverage is given for each beneficiary.
Be aware of the implications of bank mergers and acquisitions. If you have deposits at both banks, you may inadvertently end up with uninsured balances. However, the FDIC provides a six-month grace period where the ownership categories are insured separately for each affected bank. If necessary, make sure to restructure your accounts within that time period.
Periodically review your beneficiaries for your trust accounts, because the death of a beneficiary can reduce your FDIC coverage.
Because the deposit insurance rules are so complex, you may want to use FDIC’s online tool, Electronic Deposit Insurance Estimator (EDIE), to estimate your total coverage at any particular bank. If, after exhausting all of your options, you still have uninsured balances remaining, then your final option is to open another account at a different bank.
By understanding the FDIC rules and structuring your accounts appropriately, you can ensure that all of your bank deposits are insured. That way, if you’re ever affected by a bank failure, it may be easier to sleep at night knowing that your insured deposits are backed by government support.
What if my bank fails?
If you’re one of the unlucky few who has uninsured deposits at a bank that has already failed, there’s not much you can do to increase your insured amounts at this stage.
However, there are some important things you should know and actions you should take in order to maximize the recovery of your assets:
- Take an inventory of all of your bank deposit accounts at the failed bank.
- Collect information such as account balances, account names and names of beneficiaries.
- Make sure to include any CDs issued by the bank that were purchased in brokerage accounts.
- If you or your family’s account balances total more than $250,000, use the FDIC online tool EDIE to estimate your insurance coverage. Due to separate coverage on different ownership categories, your accounts may be covered beyond the basic coverage amount.
Any account balance exceeding your FDIC coverage is considered an uninsured deposit. Visit the FDIC Web site for more information.
Expect interest rates on CDs issued by a failed bank to be reduced. It’s important to know that the acquiring bank has the right to change CD terms; however, you also have the right to terminate without penalty. Should you choose to do so, the new bank would pay back your principal in full. You could then re-invest elsewhere, if you’re not happy with the new interest rate or terms.
Any CDs transferred to an acquiring bank, however, will continue to be FDIC insured.
Continue making loan payments on outstanding debt owed to the failed bank. The terms of the loan are fixed, and you’re contractually obligated to pay. However, if you have any uninsured deposits at the failed bank, you may be able to deduct the outstanding loan balance from the uninsured balance if the title on both is the same; discuss this with an FDIC claims agent.
Make an appointment with an FDIC claims agent to make claims on your uninsured deposits. The amount of uninsured deposits you may receive, if any, will be based on the sale of the failed bank’s assets. As assets are sold, uninsured depositors receive periodic payment on their uninsured deposit claims. Although this is better than receiving nothing for your uninsured balances, the process can take years.
In specific circumstances, the FDIC, can, and has, offered expedited payments, but they’re not required to do so. For more information on FDIC coverage, please refer to FDIC’s comprehensive guide, Your Insured Deposits.
Note 1. On October 3, 2008, FDIC deposit insurance temporarily increased from $100,000 to $250,000 per depositor through December 31, 2009. IRAs and certain other retirement accounts for which the deposit insurance limit already was $250,000 prior to October 3, 2008 will continue to be insured up to $250,000.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized advice. The strategies mentioned here may not be suitable for everyone. Each investor needs to review their portfolio strategy carefully for his or her own particular situation before making any decisions. Certificates of deposit offer a fixed rate of return and are FDIC-insured up to $250,000 per person per institution through December 31, 2009 ($250,000 for certain retirement accounts too). There may be costs associated with early redemption and possible market value adjustment. A CD with a maturity date after December 31, 2009 is scheduled to revert back to $100,000 for non-retirement accounts and remain $250,000 for retirement accounts. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Please be sure to research this information further before making any decisions as the rules and restrictions described are subject to change in reaction to shifting market conditions. The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc. Brokerage products offered by Charles Schwab & Co., Inc., are not FDIC insured, are not deposits or guaranteed obligations of a bank, and are subject to investment risk. (0309-7421)
[This post is adapted from an article written by Rob Williams, Director of Income Planning, Schwab Center for Financial Research and first appeared on the Schwab Institutional website on March 16, 2009]