The FDIC (Federal Deposit Insurance Corp) is a government agency designed to protect consumers and the financial system of the United States. The FDIC It is best known for deposit insurance, which helps clients avoid losses when a bank fails.
- 1 Brief history of the FDIC
- 2 FDIC: Deposit Insurance
- 3 FDIC: Account Protection
- 4 What is covered and what is not covered by the FDIC?
- 5 FDIC: Coverage Limits and Hedging Mechanisms
- 6 How to Maximize FDIC Coverage
- 7 FDIC Deposit Insurance Financing
- 8 Mergers and hedging under the FDIC
- 9 How to get your money after bankruptcy
Brief history of the FDIC
The FDIC was created by the Glass-Steagall Act of 1933. Its goal was to prevent bank failures during the Great Depression.. At that time, with the banking panic, some bank failures snowballed.
Many banks had invested depositors’ funds in the stock market, which crashed in 1929. When depositors found out, they all rushed to withdraw deposits from their banks.
The funds that were not invested in securities were used to make loans at a profitable rate of interest. The profit allowed them to pay interest on deposits. During the crisis there came a time when the banks they did not have enough money available to meet the demands of depositors rushing to withdraw their money. As a result, many went bankrupt.
So many banks had closed by 1933 that President Franklin D. Roosevelt declared a bank holiday to stop the panic. On March 6, three days after taking office, he closed all banks in the US Congress passed the Emergency Banking Act on March 9 to restore confidence before banks reopened. This laid the groundwork for the FDIC.
The Banking Act of 1935, also known as Glass-Steagall, designated the FDIC as an official government agency. Since then, the FDIC notes that “no depositor has ever lost a single penny of insured funds as a result of a bankruptcy.”
FDIC: Deposit Insurance
When you deposit funds in a bank, you probably assume that the money is safe.. There it is difficult for someone to steal it, and it will not be destroyed if your house burns down. Additionally, banks have security systems and backup plans that are virtually impossible for any malicious individual to bypass.
Within their normal operations, banks invest customer deposits to obtain income. This way they can pay the interest on savings accounts, certificates of deposit (CDs) and other products. These investments include loans to clients and other more complex operations.
Banks normally invest conservatively, but any investment carries the possibility of losing money. If a bank’s investments consistently generate losses, the institution may not be able to meet customer demands who want to use the money they have deposited in the bank. When that happens, the bank goes bankrupt.
If your account is insured by the FDIC, in the event of a bank failure, you will have protection. The FDIC will compensate you, replacing your funds or sending you the money.
However, FDIC coverage has limits. Certain types of accounts are not insured, and those that are are only up to $250,000 per depositor per bank. Of course, you can obtain additional coverage in the same bank depending on several factors, one of them is the ownership of the accounts, but we will talk about this later.
FDIC: Account Protection
Thanks to FDIC insurance, there is no need to rush to the bank and try to withdraw the insured funds before the bank goes under.. However, there are always exceptions. You may want to have liquid funds available elsewhere if the bank failure process takes some time. Also, if you have uninsured funds in the bank because you have deposited more than the maximum amount ($250,000 per individual depositor) you are taking a risk.
Please note that credit unions are not covered by FDIC insurance.. Instead, they receive very similar government-backed protection under the National Credit Union Shares Insurance Fund (NCUSIF).
What is covered and what is not covered by the FDIC?
FDIC insurance is applies to deposits in banks that are members, including funds deposited in:
FDIC insurance does not cover:
- The contents of the safes
- Investments in stocks, bonds, or Treasury securities such as T notes
- Investments in exchange-traded funds or money market mutual funds
- Insurance products, such as annuities
Note: Points not covered by the FDCI are not considered deposits even if you purchased them through your bank.
FDIC insurance also does not cover theft, whether from fraud, identity theft, or bank robbery. However, banks often have guarantees that insure against these types of losses from theft, fire, flood, embezzlement, and other events that can cause money to disappear.
Federal law protects you from most fraud and errors on your accounts, but you must act quickly to get full protection.
FDIC: Coverage Limits and Hedging Mechanisms
FDIC insurance is not unlimited. Having too much money in a bank or account can expose you. The $250,000 limit is separate for each bank you have an account with. Therefore, if you have an amount of money that exceeds the established limit, you can take advantage of the FDIC coverage policy by using several banks or properly structuring your accounts within a single bank.
To get more than $250,000 of coverage at a bank, spread the money over different securitizations or registrations. For example, the money in your taxable individual account is separate from the money in your individual retirement account (IRA). To find out if your assets are comfortably under the maximum coverage limits, use the electronic deposit insurance estimate (EDIE or Electronic Deposit Insurance Estimator).
For example, what if you have $250,000 in your individual account and $250,000 in your IRA at the same bank? While it may appear that you are over the $250,000 limit, you may be fully covered due to the way these accounts are titled. However, be careful not to go over the limit.
How to Maximize FDIC Coverage
If you have an amount of money that exceeds the limits, we recommend analyzing how you can protect yourself and request advice if necessary. To maximize FDIC coverage, use strategies to spread your money across different banks and different account holders..
1. Certificate of Deposit Account Registry Service (CDARS or Certificate of Deposit Account Registry Service)
CDARS is a network of banks that allows you to distribute your money. You’ll open an account at a bank (possibly the same bank you already use), and if it participates in the CDARS, your excess funds will go to other FDIC-insured banks. You’ll stay below the coverage limits at each bank and you’ll see your assets on a statement. Ask your bank if it participates in CDARS.
2. Intermediated CDARs
Intermediated certificates of deposit are offered by financial intermediaries such as financial advisors. By purchasing FDIC-insured CDs from multiple banks in your brokerage account, you can stay below coverage limits.
3. Account titling
As mentioned above, you can move your excess funds to another FDIC-insured bank and have a $250,000 account with two or more banks. You can also change the name or title of your accounts. If you exceed your bank’s coverage limits, consider putting the accounts in the name of each family member or creating a joint account with two or more people.
Changing the title of the account also means a change of ownership of the funds. This change could have significant tax consequences for you and the person named. In addition, you may put yourself at risk of losing your assets if the other account holder’s circumstances change.
Talk to an attorney, an accountant, and any affected family members before you start making account ownership changes.
4. Trust accounts
Moving funds to a trust account can also increase the total limit at a bank, particularly if the trust has multiple beneficiaries. For example, you might consider setting up a formal or informal revocable trust, which would allow you to be insuring up to $250,000 for each of five beneficiaries. Coverage is also available for more than five beneficiaries, subject to certain rules and limitations.
FDIC Deposit Insurance Financing
In addition to protecting your money, the FDIC is an insurance fund. Like any insurance fund, this creates a large pool of money that can be used to cover bank losses. All that money comes from the insured banks and from the profits that the same fund generates. Taxpayer dollars don’t go to the bottom, though the FDIC could call on taxpayer support in a worst-case scenario.
To provide the financing, FDIC-insured banks pay premiums to the fund. Clearly, with numerous banks paying premiums, the cost of bank failures is shared and spread over time. This situation could be seen as a danger by encouraging banks to take unnecessary risks, knowing that there is a fund that will solve the situation if it gets complicated. For what was said above, the FDCI has a number of conditions and requirements that regulated banks must meet to be backed by it.
Although self-funded, FDIC insurance is also often considered “government guaranteed.” The assumption is that the US Treasury would step in if the FDIC insurance fund ran out of money.
Mergers and hedging under the FDIC
Pay attention to news about bank mergers and bailouts of failing banks. What if you have accounts at Bank A and Bank B, and the two banks merge? If there is an FDIC-handled bank failure, the insurance coverage will often treat your deposits as if they were in separate institutions but only for a short period of time. However, before that period ends, you may want to move your assets elsewhere to stay within the coverage limits.
How to get your money after bankruptcy
If your FDIC-insured bank fails, the FDIC will step in and try to sell your bank’s loans and deposit accounts to a financially sound or stable bank. If the sale goes through, your account will be transferred to the solvent bank. If the sale does not go through, the FDIC will send you a check for the insured portion of your qualifying accounts. And if for any reason the FDIC needs more information from you, you’ll receive correspondence in the mail.
In most cases, bank failures are brief and uneventful for customers. Your checks won’t bounce, you can go to the ATM and use your debit card without interruption. Plus, your bills continue to be paid electronically. It is possible that you have to wait a few days or weeks to withdraw money, although it is really normal that you do not have to wait at all.