State-Chartered Banks Have Security Edge | Little known insurance provides consumers extra peace of mind
Photo/Livia Gershon
Edward Manzi, president and CEO of Fidelity Co-operative Bank in Fitchburg.
Massachusetts’ small businesses and individuals who keep their money in state-chartered banks and credit unions possess something customers at banks in every other state lack: full insurance on their deposits.
And in the wake of the second largest bank failure in American history and a spike in the number of failed banks nationwide, that fact has created a new marketing tool for financial institutions across Central Massachusetts.
Money Backup
Here’s how it works: All state-chartered credit unions, savings and cooperative banks in the Bay State belong to one of three funds that guarantees the entire sum of deposits over and above anything insured by The Federal Deposit Insurance Corp. (FDIC). Typically, the FDIC insures a named depositor for up to $100,000, or $250,000 for retirement account holders, and pays a percentage of any amounts over that figure. But in Massachusetts, any money over that amount is insured in full by the Depositors Insurance Fund (DIF), Share Insurance Fund (SIF) or the Massachusetts Credit Union Share Insurance Corp. (MSIC), which act as backstops for savings banks, cooperative banks and credit unions, respectively.
“It’s very meaningful insurance,” said Edward Manzi, president and CEO of Fidelity Co-operative Bank in Fitchburg. “There’s never been a dollar lost. And while most times, it’s probably not in the front of customers’ minds when they are looking for a bank, it is something we have, and is a part of our safe-lending strategy and helping people make informed decisions about their money.”
Trends in the banking industry — and some say, media headlines — have contributed to some public anxiety about bank failures. Including IndyMac, there have been 11 bank failures nationwide this year, according to the FDIC. That number is up from three in 2007, and zero in both 2005 and 2006. Worries over the credit crunch — which was largely responsible for the July collapse of IndyMac, a major mortgage originator — have prompted speculation by regulators and some industry-watchers that more trouble could lay ahead in the banking world.
There are roughly 200 banks in the Bay State, 85 percent of which are state-chartered. Those that aren’t, rely solely on the FDIC for deposit insurance, but that insurance is more than adequate, said Bruce Spitzer, spokesman for the Massachusetts Bankers Association.
“In the unlikely event of a bank failure, there’s no reason to think depositors would not be made whole,” he said. “And besides that, banks in the state are in very good shape. Our level of capital reserves is at an all-time high.”
Still, deposit insurance has come to the forefront of a lot of banking customers’ minds, said Peter Conrad, president and CEO of the Share Insurance Fund. “When IndyMac went under, we had a lot of calls from concerned depositors, and some even wanted to know how they could go about putting their money into a cooperative bank. The coverage is something that our members advertise — that they are both FDIC and SIF insured.”
All Hype?
Of course, some think that the importance of these financial backstops has been slightly overblown.
“The reason why this has come to the forefront is the failure of IndyMac,” said Peter Nigro, a Holy Cross grad and former federal banking regulator who now teaches finance at Bryant University in Rhode Island. “The FDIC has to do a better job of letting people know their funds are insured, and that the risks any of these state banks have to cover is pretty low. Most clients have less than the insurable amount, and so to them it matters very little, anyway.”
And even for those that it does matter, there are ways to split up accounts — either in the same bank, or across several banks — to maximize coverage, Nigro said. “For most people, it’s not going to make much of a difference, though.”
Nevertheless, more people are asking questions about how they can better protect their assets, said Stefan Jouret, a banking lawyer with the law firm Deutsch Williams in Boston. “They want to know they are protected. People haven’t had to think about this in a long time, and there are a lot of people who have that exposure. One-hundred grand isn’t what it used to be.”
Dan Murphy, vice president of marketing and business development for the MSIC, said it’s become a rallying point for credit unions. “Many of our credit unions run marketing campaigns based around this fact,” he said. Unlike its counterparts, MSIC also insures some federally chartered credit unions — 22 of them.
It’s not just customers, however, that end up seeing a benefit from the funds. For some bankers, there is an added benefit to not having to secure excess deposit insurance every year, said Guy Boyer, president of Barre Savings Bank, who came to Massachusetts from Pennsylvania. “Being a part of DIF we don’t have to try and find coverage somewhere else — a great benefit to us,” he said.
Added Paul Jalbert, CEO Savers Co-operative Bank in Southbridge: “For us it’s definitely of value. Our depositors are insured in full, and that is how we advertise to them.”
Kenneth J. St. Onge is a freelance writer based in Connecticut and a Worcester native.
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