FDIC assures bank deposit safety - with limits
With all the problems facing banks these days, how safe are your deposits?
The question hasn't popped up all that much lately, which is a bit surprising considering all the troubled-loan writedowns, loan-loss provisions and profit woes facing big financial institutions in the wake of the sub-prime mortgage meltdown.
Banks in general are still profitable, yet industry earnings for the fourth quarter plunged to a 16-year low, while the number of institutions defined as "problems" by the Federal Deposit Insurance Corp. rose to 76 last year from a recent low of 50 in 2006. Nearly 12 percent of banks and savings institutions were unprofitable at the end of 2007, up from 6 to 8 percent in each of the prior five years.
Bank failures have not mounted as you might expect. The FDIC last year took over just three of the more than 8,500 commercial banks and savings institutions that it regulates, but you never know what lurks around the corner.
Within this environment, it's smart to make sure your deposits have government backing.
The first thing to note is securities - even those purchased inside a bank - don't come with insurance. This includes stock and bond mutual funds, money-market funds and various annuities.
Saving and checking accounts, money-market deposit accounts, certificates of deposit and the like do come with FDIC backing, with limits.
The basic ceiling is $100,000 including interest per depositor per insured institution (nearly all banks are covered), or $250,000 per depositor per bank on IRAs and certain other retirement accounts.
The insurance limit expands if you hold accounts in different ownership forms, such as joint accounts and some trusts.
Suppose you and your spouse have a joint checking and joint savings account at the same bank. Your shares in both accounts are added together and insured up to $100,000, providing $200,000 in combined coverage, according to an FDIC example.
It's highly possible deposits above those limits would be honored by whatever bank takes over the accounts of a struggling rival in the case of a failure. Such FDIC-arranged deals have happened before, although they're not guaranteed.
If in doubt, you should break up large deposits among different banks.
Still, some depositors want more coverage at a single bank without having to deal with multiple entities. It's available.
Promontory Interfinancial Network, a firm based near Washington, D.C., offers a service that splits large deposits among multiple banks in a network, with each participating institution receiving a sum below $100,000 so as to keep full FDIC coverage in force.
This deposit-sharing arrangement, which Promontory calls its Certificate of Deposit Account Registry Service, can ensure FDIC coverage on deposits up to $50 million through nearly 2,000 institutions, said spokesman Phil Battey.
The service provides convenience for corporations, municipalities, homeowner associations and other groups with large accounts. Even some individual depositors like it.
Jim Essert, a money manager who lives in Phoenix, has more than $100,000 in fully insured personal funds spread among CDs with different maturities. He deals with Camelback Community Bank in Phoenix, although other banks take a portion of his deposits. "With the CDARs product, I get only one statement and don't have to deal with a lot of banks," Essert said. "It's convenient."
For what it's worth, the FDIC deposit fund, which is fully backed by Uncle Sam, counts $52.4 billion in assets to cover $4.29 trillion in insured deposits. That equates to a reserve ratio of 1.22 percent, a figure that has remained highly stable over the past three years.
But is that enough of a cushion? Hopefully, we won't have reason to find out.
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