The Importance of FDIC Insurance

Episode 225 – Recent financial turmoil involving several large banks provides an important lesson and opportunity to revisit the general FDIC-insurance rules and limitations.

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Transcript of Podcast Episode 225

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, The Importance of FDIC Insurance.

The fragility of the banking industry and the near collapse, bankruptcy and/or receivership of several large banks have dominated recent news headlines. The affected banks include Silicon Valley Bank, the nation’s 16^th largest bank; First Republic Bank, the nation’s 14^th largest bank, both as of December 31, 2022; and Signature Bank. This has caused the federal government and several of the largest banks to band together to provide assistance.

As many of you may know, typically, the Federal Deposit Insurance Corporation or FDIC provides assurance that depositors’ funds are insured from bank failures up to $250,000. However, many depositors’ accounts in these banks far exceeded that limit causing personal and market turmoil. As a result, the FDIC has had to invoke its so-called “systemic risk exception” to prevent uninsured depositors at these institutions from taking losses. Although the FDIC was created by the Banking Act of 1933 during a severe banking crisis, to restore the public’s confidence in banks, the “systemic risk exception” wasn’t created until the Federal Deposit Insurance Corporation Improvement Act of 1991. The exception was first used in 2008 when Wachovia, Citigroup, and Bank of America, three of the four largest banks at that time, were in crisis.

Given the reality that banks can and do fail, now would be a good time to review the general rules that apply to FDIC insurance. Note that while most banks are, not all banks are FDIC-insured banks. What does that mean? Only FDIC-insured banks provide depositors with FDIC insurance that will protect your money in the event of a bank failure. The FDIC insurance extends to checking accounts, savings accounts, money market deposit accounts, and certificates of deposit. The standard insurance amount is $250,000 per depositor, per insured bank, for account ownership category. Accounts such as stock brokerage accounts, bonds, mutual funds, life insurance policies, annuities, safe deposit boxes, and others, are NOT FDIC-insured, although there may be other state or federal regulatory insurance.

For example, if a depositor has a checking account, savings account and money market deposit account in the same bank, the FDIC insurance aggregates those accounts to meet the $250,000 maximum coverage because those accounts fall into one account ownership category (i.e., sole ownership). If the depositor has more than $250,000 to save, then the depositor should be encouraged to split that amount to accounts in multiple FDIC-insured banks, up to the $250,000 maximum in each bank, to ensure the widest insurance coverage.

However, if the depositor is also a joint account owner of an account in the same bank as their individual accounts, then there is a separate $250,000 maximum that applies for each joint account owner for those jointly owned accounts. That satisfies the “account ownership category” requirement. For example, if two spouses are joint account owners, then each of them would have up to $250,000 of FDIC insurance for the joint accounts in that bank. That means $500,000 of joint account savings would be covered. That would be in addition to any accounts in that bank under individual names. The same would be true for accounts held in the name of a revocable living trust, irrevocable trust or a business entity. These accounts may all enjoy separate insurance coverage up to $250,000 in that same bank.

The general rules for determining if accounts are insured and to what extent, can often rest on the account ownership category. Calculating the FDIC-insurance coverage can, at times, get complicated but, given the surprise of the recent bank issues, is a worthwhile exercise if you have more than $250,000 to save in a bank account.

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