If all of the recent turmoil in the banking industry with the failures of major institutions such as Silicon Valley Bank (SVB), Signature Bank, and Credit Suisse has got you worried, then here is something that may put your mind at ease. Just as you’ve got insurance on your home or vehicle in case something bad happens, every American also has automatic insurance on their bank accounts thanks to the federal government. It’s called FDIC insurance, and in this post, we’ll explain how it works and some tricks you can use to optimize your coverage.
What is FDIC Insurance?
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the U.S. government that protects and reimburses your deposits in the event that your FDIC-insured bank fails. The standard coverage amount is $250,000 per depositor, per insured bank, for each account ownership category.
In other words, if the bank where you keep your savings or checking account were to close its doors tomorrow, FDIC would step in and make sure that you get back up to $250,000. According to the FDIC, no depositor has ever lost a penny of FDIC-insured funds since its inception.
When Did the FDIC Start?
The FDIC was created by the Banking Act of 1933, enacted by Franklin D. Roosevelt during the Great Depression. Following the collapse of the stock market in 1929, millions of citizens panicked and went to their banks demanding to withdraw their savings. This is often referred to as a “bank run”.
Because banks operate on a system of fractional reserve banking (i.e., they only keep a small portion of depositors’ money on hand), they had to turn people away. This only created more hysteria and led to a growing distrust of banks by the public.
In an attempt to calm down depositors, the bank’s main recourse to get immediate funding is to sell off some of its assets (such as long-term government bonds). However, when they do this, they will often be at a loss depending on the markets. Coincidentally, this is exactly what happened in March with SVB.
Going back to the 1930s, the FDIC was created as a way to curb bank runs and restore trust in the American baking system. With today’s coverage of $250,000, most working Americans’ savings are more than protected by this limit.
However, one caveat to keep in mind is that not all banks are necessarily FDIC-insured. Federally or nationally chartered banks (such as those that belong to the Federal Reserve System) must have FDIC insurance. Some regional banks will only have FDIC insurance if the state where they operate requires it.
You look up any bank you want using the FDIC’s Bank Find Suite to see if its a member. This is a helpful tool for screening online banks offering high-yield savings accounts.
What’s Covered By FDIC Insurance?
The FDIC covers many different types of retail banking products:
- Checking accounts
- Savings accounts (including high-yield savings accounts)
- Time deposits such as certificates of deposit (CDs)
- Money market deposit accounts (MMDAs)
- Negotiable order of withdrawal (NOW) accounts
- Cashier’s checks, money orders, and other official items issued by a bank
Are Credit Unions FDIC Insured?
No. Because credit unions are technically a different type of financial institution than banks, they are not covered by FDIC insurance. However, since also don’t want bank runs, they have a similar type of insurance run by the National Credit Union Administration (NCUA).
The NCUA provides the same level of coverage as FDIC insurance ($250,000). In general, this covers relatively the same types of financial products as banks including savings accounts, checking accounts, CDs, etc.
Are Investments Covered by FDIC?
No. Speculative investments such as stocks, bonds, mutual funds, ETFs, etc. do not qualify for FDIC insurance. As an investor when you buy a share of stock, you inherently take the risk that it might go or down in value – even if that means losing everything. Unfortunately, this is not something that the FDIC or any other type of insurance is going to protect you from.
However, the brokerages themselves are covered by a different nonprofit entity called the Securities Investor Protection Corporation or SIPC. The SIPC provides brokerage account holders with insurance up to $500,000 per client in case the financial institution fails or your assets go missing.
To clarify:
- If you buy $10,000 worth of stocks on a relatively new trading platform and the stock market crashes, then you’d lose your investment.
- However, if the trading platform itself goes bankrupt, then SIPC would step in and return your $10,000.
This type of brokerage coverage should not be taken for granted. Many people learned the hard way in 2022 that some investment exchanges such as crypto trading platforms aren’t SIPC insured. Because the SEC does not classify cryptocurrencies as securities, the platforms they trade on don’t have to carry SIPC insurance. As a result, customers who held assets in exchanges that went bankrupt such as FTX, BlockFi, and Celsius will, unfortunately, lose the majority of their investments.
How to Maximize Your FDIC Coverage
While $250,000 may sound like a lot of money to some people, it may not be enough for others. For example with SVB, many of their clients had accounts that exceeded this limit. Excluding business-related customers, this makes sense when you take into consideration that the cost of living in California is much greater than in most other parts of the country.
Thankfully, you can leverage the FDIC insurance rules so that you can exceed the basic coverage limits. Here’s how to do that.
1. Spread Your Wealth Across Multiple Banks
Recall that by definition each depositor is insured per institution. Therefore, an easy strategy to implement would be to divide your wealth among more than one bank. For example, you could deposit $250,000 in one bank and then $250,000 in another bank. This would give you $500,000 worth of FDIC coverage.
One thing to watch out for is that these banks cannot just be different branches of the same institution. They have to be completely separate entities.
2. Open a Joint Account
Because FDIC insurance is per owner, accounts with more than one person get special privileges. For example, if you and your spouse have a joint account, then your coverage doubles to $500,000 ($250,000 per co-owner).
3. Rollover Some of Your Retirement Savings
Another nuance to FDIC coverage is that it’s per “ownership category”. One of those categories that may be of particular interest is retirement accounts such as IRAs.
To clarify, this would not cover retirement accounts that are the usual types of investments such as mutual funds, stocks, etc. Again, those types of assets aren’t covered.
Yet, remember that IRAs can be used to hold many different types of assets. Often people will open IRAs at banks for standard products such as CDs and money market accounts, and they do qualify for FDIC insurance. Therefore, Therefore, if you have these types of assets in your retirement account, then it would have $250,000 of coverage as well as your savings account for a total of $500,000 worth of coverage.
Take a Sigh of Relief
In summary, unless you’ve got hundreds of thousands of dollars sitting in one bank account, you’re most likely going to be okay. FDIC insurance is there to protect your deposits in the unlikely event that something happens to the financial institution you work with. So rather than wasting your energy worrying about it, focus on what you can control: budgeting your money, working towards your goals, and setting yourself up for future financial success.
Featured image credit: FDIC
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