News of bank collapses has become familiar to Americans, prompting many to fear the possibility of their own bank shutting down. Several banks with significant exposure to the technology sector, namely Silicon Valley Bank (SVB) and Signature Bank, fell earlier this year, making a big splash. To better understand how this happened and if it could happen again, let’s dig into Silicon Valley Bank’s collapse. SVB’s downfall began when they announced they were looking to raise capital. That set off alarm bells for their customers, which started a chain reaction of depositors pulling funds out of the bank.
The problem is that SVB was heavily invested in bonds that declined in value due to the Fed’s interest rate hikes in 2022. When interest rates go up, bond prices go down. So, as customers moved their money out of the bank, SVB suddenly had to sell the bonds at steep losses to fund the withdrawals.
As SVB ran out of money to pay their depositors, they got seized by FDIC regulators.
The Biden administration made all depositors whole by covering their funds to avoid additional potential banking problems.
SVB was the second-largest bank failure ever in the U.S. It took me back to 2008 when I was starting this podcast, and we saw the biggest-ever bank collapse of Washington Mutual during that financial crisis.
At the time, everyone was panicked about FDIC limits, so I did some podcasts explaining it. Since that was about 15 years ago, I thought it was time to revisit the topic. We’ll review what the FDIC does and how to make sure your money is always protected. Plus, I’ll review how it compares to SIPC protection on certain investments.
What is FDIC insurance?
FDIC stands for the Federal Deposit Insurance Corporation, an independent agency created by Congress in 1933 to keep our banks healthy and maintain Americans’ confidence in our financial system. It was established as a response to thousands of bank failures during the Depression in the late 1920s and early 1930s.
FDIC insurance only applies to deposits at member banks, which pay premiums to the FDIC. It’s backed by the “full faith and credit” of the federal government to insure bank deposits, supervise banking activity, advocate for consumers, and manage receiverships when a covered institution goes out of business.
FDIC covers checking accounts, savings, money market deposit accounts, and certificates of deposit (CDs). Note that credit unions that belong to the NCUA or National Credit Union Administration get similar protections. So, it’s critical that you only put your money in insured institutions.
Be aware that neither FDIC nor NCUA coverage insures any financial product or investment like stocks, bonds, mutual funds, exchange-traded funds, cryptocurrency, annuities, or life insurance–even if you buy them from an insured institution.
While there is a limited amount of SIPC (Securities Investor Protection Corporation) coverage for investments, it’s very different from FDIC or NCUA protections. I’ll touch on what SIPC covers at the end of the show.
How does FDIC insurance work?
You’ve probably heard that when you deposit money in an FDIC-insured bank, you get coverage up to $250,000. Since there’s some nuance to that limit, I’ll explain how it works. I want you to understand that the $250,000 coverage applies per account owner, account type, and institution. Stay with me, and I’ll explain.
Firstly, since you get separate coverage for deposits at different banks, it’s wise to spread out your money when you exceed the limit for an account type. There are many different bank account types, but some of the most common include single, joint, trust, and retirement.
That means you can qualify for more than $250,000 if you have different account types, such as single ownership in your name only and joint ownership with a spouse or partner.
For instance, let’s say you have a checking and savings account in your name only, which are single ownership accounts. You could have any combination of $250,000 in them, such as $25,000 in checking and $225,000 in savings, and be covered.
If you have joint accounts, each co-owner gets insurance up to $250,000. So, you and a spouse would receive up to $500,000 for your shared accounts. In addition, if you open your own individual savings separately, it would have $250,000 of coverage on top of your joint account coverage. (Learn more at Kids Bank Accounts Parents Should Consider)
Can you receive higher FDIC limits?
In some situations, you might receive higher FDIC insurance limits. For instance, if you have a cash account with a brokerage firm, they may allocate your funds across multiple banks and offer more coverage than an individual bank. That’s the case with my brokerage, Betterment, which recently increased FDIC coverage to $2 million for single-ownership accounts and $4 million for joint accounts.
What is SIPC insurance?
Although FDIC-insured bank customers can rest easy knowing deposits are insured up to limits no matter why an institution fails, there’s no similar insurance for investors. However, the SIPC gives you some relief if your stock broker or mutual fund family closes due to financial trouble and your money is missing.
The SIPC is a nonprofit corporation created by Congress in 1970 to cover investors’ losses up to certain limits. It acts as a trustee or works with an independent court-appointed trustee to recover missing cash, stock, or other securities if your brokerage goes out of business and still owes you money. The SIPC oversees the recovery process to ensure customer claims are paid fairly on a pro-rata basis.
If the SIPC can’t fully satisfy all investors’ claims, they have a reserve account funded by member brokers that can get used to make up the difference, up to certain limits. The reserve can supplement each investor’s losses for up to $500,000, which includes a maximum of $250,000 for cash claims.
Be aware that the SIPC doesn’t protect every type of investment. They generally don’t work to return funds for futures contracts, limited partnerships, cryptocurrency, or fixed annuity contracts that aren’t registered with the U.S. Securities and Exchange Commission (SEC). Nor do they ever cover losses due to market volatility.
So, only do business with SIPC member brokerages. You can visit the SIPC website to search for companies in their member database.
To sum up, the SIPC differs from the FDIC because it does not insure invested funds. The SIPC helps investors when their money gets stolen if their brokerage goes out of business—but they don’t bail out investors from bad investments or market volatility.
There’s no guarantee or insurance against losses or fraud in any investment marketplace. As you know, different types of investments come with varying amounts of risk. Being an investor means understanding these inherent risks and being willing to take the gains with the losses.
This article originally appeared on MoneyGirl and was syndicated by MediaFeed.org.
9 myths about FDIC insurance debunked
When I was growing up, my grandmother kept her cash in a coffee can above the fridge. I never knew how much money was in that old blue Maxwell House tin, but I was always worried that one day it would somehow disappear and her hard-earned savings would be lost.
It wasn’t until I got older that I realized why my grandmother kept her money in that can. Eight years before she was born, her parents lost all their savings when their bank failed in the wake of the Great Depression.
Whether my grandmother realized it, her parents’ financial loss shaped her own trust in financial institutions and their ability to keep her money safe and secure. But although depositors in the ’20s and ’30s had reason to fear (whether they realized it then), Americans today can rest easy and continue to make smart money moves in a volatile market thanks to the Federal Deposit Insurance Corporation.
But many of us don’t fully understand what this insurance does and doesn’t do for us. So here’s everything you need to know about FDIC insurance.
Related: Recession checklist: 7 things you need to survive an economic downturn
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Founded in 1933, the FDIC has been providing Americans with peace of mind regarding their bank deposits for nearly a century.
The agency was created by Congress in the wake of the Great Depression-era bank failures — a total of about 9,000 banks failed between the late 1920s and 1930s — when American depositors lost deposits worth an estimated $140 billion in today’s dollars.
Following these failures in 1933, the FDIC was founded to help regain the confidence of depositors and ensure that hardworking Americans never again had to worry about their money disappearing if their bank suddenly went belly up. A year later in 1934, the FDIC introduced its deposit insurance coverage. Since then, no depositor has lost a single cent of their covered funds due to a bank failure.
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You’ve probably seen FDIC insurance referenced on your bank account paperwork, in commercials, or on solicitations for new accounts. But there are probably quite a few of us walking around who have no idea what this coverage is for or whom it protects.
According to the FDIC, the purpose of this insurance coverage is to “protect the funds depositors place in banks and savings associations.” If you put your money into a deposit account at an FDIC-insured bank and that bank fails for some reason, you essentially have a government-secured insurance policy that prevents you from taking the brunt of that loss.
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As with any insurance policy, there are limitations to the FDIC coverage that may come with your account. For starters, FDIC insurance coverage protects each depositor up to $250,000 per account ownership category, per banking institution. If you have multiple accounts of the same type at the same bank, that insurance limit is applied to your total deposits held there.
Account ownership types are broken out into single accounts, joint accounts, revocable and irrevocable trust accounts, government accounts and a few others. So if you have three single accounts that you alone own, the $250,000 limit is applied across all three. However, if you have three single accounts and a joint account that you own along with another person, these are in different ownership categories. Therefore, the $250,000 total limit for the single account is separate from your $250,000 limit for the joint account.
Additionally, it’s important to note that not all types of accounts are covered. The types of deposits that are protected by FDIC insurance include:
- Checking accounts
- Savings accounts
- Money market deposit accounts
- Certificates of deposit (CDs)
- Cashier’s checks, money orders, and other official items issued by a bank
- Negotiable order of withdrawal accounts
However, there are some accounts in which your money is not protected. These include:
- Accounts held at credit unions (these funds are typically protected by National Credit Union Association coverage instead)
- Stocks, bonds, or mutual fund investments
- Life insurance policies
- Safe deposit boxes (and anything you’ve put inside)
- Annuities or municipal securities
- U.S. Treasury bills, bonds, or notes (these are federally backed)
In addition, certain types of account ownership can allow for more coverage. For example, if you have a joint account with a spouse, you are each covered for up to $250,000 on that account.
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There are a handful of myths about FDIC insurance that seem to float around, which can be misleading if you don’t know the facts. Here’s a look at the most common FDIC myths and where the truth lies.
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Before 2008, FDIC insurance coverage was limited to $100,000 per depositor, per institution. However, with the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act, this coverage was permanently raised to $250,000. So this is less myth and more outdated information, but nonetheless important to clarify.
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Yes, it’s true you will typically only be responsible for up to $50 in unauthorized electronic fund transfers if your account is reported as being compromised in some way (through fraud, theft, unapproved access, etc.). However, that isn’t your FDIC insurance coverage at work. This coverage is due to the Federal Reserve’s Regulation E.
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To be honest, this one is both a myth and a truth. Let’s say you keep your money at Acme Bank, where you have a joint checking account, two individual savings accounts and an individual money market account. If Acme Bank goes under, those account categories will be taken into consideration when determining your FDIC protection.
Your single accounts — the two savings accounts you alone own and the individual money market account — fall under the single ownership category. This coverage is calculated per depositor, per institution, not per account. So you would have $250,000 in FDIC insurance protection for all three combined. However, the joint checking account is insured separately, because it falls into a different account ownership category. As a result, it would receive its own FDIC coverage up to the allowed limit ($250,000 per co-owner, per institution).
As a note, FDIC ownership categories include single accounts, joint accounts, some retirement accounts (such as individual retirement accounts), revocable trust accounts, irrevocable trust accounts, employee benefit plan accounts, government accounts and corporation/partnership/unincorporated association accounts.
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This is a continuation of the myth above. Regardless of how many accounts you have at a particular bank or if you opened them at different branches, they will count against your $250,000 total coverage limit for that bank if they fall into the same ownership category. So if you have three of the same type of account at the same bank and all three are owned by you alone, you’ll get $250,000 in coverage total.
You are eligible for additional coverage if you have accounts that fall into multiple ownership categories. In that case, each category total is eligible for $250,000 in protection per owner, per institution. So you owning one joint account and one single account would equate to up to $500,000 in total coverage. However, having multiple accounts does not alone qualify you for additional coverage, especially if they fall into the same ownership category.
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Just because your bank is FDIC insured — and some of your accounts are protected — doesn’t mean that every dollar you have deposited with that bank is covered. Keep in mind that FDIC insurance is limited to certain account types. So although your checking and savings account might be protected, your investments and life insurance policy held by the same bank would not be.
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This one might be a bit confusing, given the other debunked myths above and the FDIC’s staunch rule of $250,000 in maximum coverage. However, there are some cases in which an account can be protected for more.
For example, trust accounts can be protected by $250,000 in coverage per beneficiary, as long as they meet certain criteria. So if you and your five siblings are all equal beneficiaries of a revocable trust, and the bank holding that trust goes under, you’ll each be protected by up to $250,000 by the FDIC — for a total of $1.5 million in deposit insurance.
Along those same lines, a joint account (such as one owned by you and your spouse) would be insured for $250,000 per owner. This would equate to $500,000 total in FDIC coverage — just be sure to keep in mind that all joint accounts held by those same owners at that same institution would go against the insurance coverage limits.
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There’s an oft-heard myth that the FDIC can take up to 99 years to get your money back to you, even if it’s lost in a covered circumstance. Although the FDIC doesn’t impose strict time limits on itself, it is bound by federal law to get your funds back to you “as soon as possible.” Its goal, according to its website, is to have your insured funds returned within two business days, with the majority of those cases being resolved the next business day.
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Although FDIC insurance can give you peace of mind when it comes to your deposits, an account without FDIC coverage isn’t doomed. Credit unions, for instance, aren’t covered by FDIC insurance, but that doesn’t increase their risk. Instead, they’re protected by the NCUA, which also offers a standard $250,000 in coverage per account holder.
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These days, online banks are gaining traction and have developed a strong reputation. For many years, though, these internet-based institutions were met with suspicion and caution, especially by those who were accustomed to brick-and-mortar banks.
It’s true the traditional banking institutions that have become household names over the years are almost all FDIC insured. But most online banks are too. So even if you’re skeptical about depositing your funds in a bank that doesn’t actually operate out of a building, you can rest assured the same coverage can still apply to your money if you choose an FDIC-insured institution.
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Most of us think back to the Great Depression as a financially devastating time period, and it was for so many people. But thankfully, the failure of 9,000 American banks has resulted in a system we can still rely on today.
We can rest easy when we put our paycheck in a bank account, thanks to the existence of the FDIC and its insurance coverage. Although there are some limitations, FDIC insurance gives most depositors the peace of mind they need to know their money isn’t going to disappear tomorrow, no matter what happens to their financial institution(s).
Learn more:
- 8 simple pieces of advice from Warren Buffett that any investor can use
- 8 clever moves when you have $1,000 in the bank
This article originally appeared on FinanceBuzz.com and was syndicated by MediaFeed.org.
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