Your money is secure and reliable with banks. Nevertheless, recent history has served as a reminder that these institutions are subject to failure, which would imply that they would be unable to fulfill their responsibilities to those who had deposited money with them or to those who they had lent money to. Continue reading to find out more about what occurs when a bank collapses.
What Is FDIC Insurance?
Customers’ funds are safeguarded in the unlikely event that a bank collapses as long as the institution is federally insured. The Federal Deposit Insurance Corporation is the supporter of a bank that is federally insured.
Via the National Credit Union Administration, credit unions also provide protection. Up to $250,000 is insured by the FDIC for each depositor, each institution, and each ownership type. Only when a bank fails does FDIC insurance begin to pay out.
Here’s a closer look at the FDIC, what it covers in detail, and how it protects your hard-earned money.
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Exactly How FDIC Insurance Works?
If your bank collapses, your money is safe up to a specific amount thanks to FDIC protection. In reaction to the numerous bank failures that occurred during the Great Depression, the FDIC was founded in 1933.
It was established to increase customer deposit insurance and boost public confidence in the banking sector. Many banks failed during the Great Recession.
The failures of Silicon Valley Bank in California, Signature Bank in New York, and Ericson State Bank in Nebraska, The First State Bank in West Virginia, First City Bank in Florida, and Almena State Bank in Kansas occurred in 2023 and 2020, respectively. Nonetheless, since the FDIC’s founding, not a single cent of guaranteed savings has been lost.
Banks are not automatically insured. They submit an application for FDIC insurance, which, like other insurance, has a cost. Nevertheless, neither you nor your taxes are used to cover the cost. Premiums are paid by the bank.
FDIC Insurance: What Is included?
The FDIC provides up to $250,000 in insurance for each depositor, institution, and ownership category (the owner of the account is referred to as the ownership category; continue reading to learn more about this). The following deposit accounts and other official materials issued by an insured bank are covered by FDIC insurance:
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Checking.
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Savings.
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Money market accounts.
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Certificates of deposit.
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Cashier’s checks and money orders.
- Negotiable order of withdrawal accounts.
FDIC Insurance: What Is Not Covered?
Here’s what isn’t protected by the FDIC:
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Annuities.
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Investments in stocks, bonds or mutual funds.
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Losses incurred from investments, even if they were purchased from an insured bank.
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Life insurance policies.
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Contents of a safe deposit box housed at a bank.
- Municipal securities.
Although they are not insured by the FDIC, U.S. Treasury bills, bonds, and notes are supported by the full faith and credit of the federal government.
What Happens If A Bank Fails?
A bank regulator closes the institution if it fails, for example by being unable to repay debts or restore customer deposits. In general, the FDIC intervenes to protect bank customers’ funds in two ways: by paying (or granting access to) monies to impacted consumers up to the insurance limit and by taking over the bank’s assets and liabilities.
In the second position, the FDIC assumes the title of “receiver” of the bankrupt bank in order to manage insured deposits, sell or collect assets, and settle obligations. Usually, the FDIC makes arrangements for a strong bank to buy out a failing one.
The Santa Clara, California-based Silicon Valley Bank, a lender to the technology sector, failed on March 10, 2023. In the meanwhile, the FDIC established Silicon Valley Bank, N.A. as a “bridge bank” to keep the assets and deposits of the former institution while the FDIC plans to sell the bank. New York’s Signature Bank failed on March 12 as well, leading to the establishment of a bridge bank.
The Treasury, Federal Reserve, and FDIC indicated in a joint statement that day that as of Monday, March 13, all clients of Silicon Valley Bank and Signature Bank will have access to all of their deposits, insured and uninsured. Shareholders and some unsecured debt holders are not included in this.
The Federal Reserve launched a new program on March 12 that provides loans of up to one year to banks and credit unions as an additional precaution against future crises. The Bank Term Financing Program seeks to offer a second source of funding so that banks won’t have to swiftly sell off investments, as Silicon Valley Bank did to satisfy depositors.
Despite occasional rises during and after a recession, very few banks really fail. There have been 563 bank failures since 2001, the majority of which were brought on by the recession that lasted from 2007 to 2009. As of December 2022, there were around 4,700 banks that were FDIC-insured. The first failed banks since October 2020 are Silicon Valley Bank and Signature Bank.
Limits And Ownership Types For FDIC Insurance
What does having up to $250,000 in FDIC protection per depositor, per institution, and per ownership category mean?
Per depositor, per institution: This indicates that the FDIC covers deposits that a single person (the depositor) owns in a single insured bank (the institution), apart from any deposits that person may own in additional, distinct insured banks. Deposits owned by a person in various branches of the same insured bank are added up to reach the $250,000 cap.
Per ownership category: The account’s owner is simply referred to as the ownership category. The distinction between a single account, which belongs to one person alone, and a joint account, which is shared by two or more individuals, is the simplest. Certain retirement accounts, such as IRAs, trust funds, and accounts for employee benefit plans are among the other categories of ownership.
Money that falls under several ownership classifications has its own coverage. So, if monies are in accounts with various ownership categories and other requirements are met, a person with multiple accounts at an insured bank may be eligible for coverage of more than $250,000. Additionally, if two people jointly own an account, for instance, that account is covered up to a maximum of $250,000 per person, for a total of $500,000.
Examples Of FDIC Insurance Coverage And Limits
Consider some examples to understand the limits of FDIC coverages.
1. You’re single, do your banking in one place and you have:
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$50,000 in a checking account.
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$100,000 in a savings account.
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$200,000 in certificates of deposit.
That is a total deposit of $350,000 made by one depositor (you), one institution (your bank), and one ownership type in one bank (single). You would lose $100,000 if your bank failed because the FDIC would only pay up to $250,000 in such an event.
But don’t worry, since the second-most crucial fact regarding FDIC insurance is that, depending on where you hold your accounts and how they are owned, you may be covered for much more. Spreading your money among various organizations is one approach to ensure that it is all covered. Take the following instance.
2. You’re single but you do your banking at two banks, and you have:
- $50,000 in a checking account at Bank 1.
- $200,000 in a savings account at Bank 1.
- $250,000 in certificates of deposit at Bank 2.
You have deposited a total of $500,000 at two different institutions (two banks) under one ownership category as one depositor (you) (single). All of your money is secure since you have $250,000 at one bank and $250,000 at another bank.
Consider another another illustration of how various ownership classifications affect the way your money is covered.
3. You and your spouse conduct all of your banking there, and you have:
- In a combined savings account with your husband, you have $500,000 available.
- $250,000 in your sole name on a certificate of deposit.
In told, that comes to $750,000. This money is all secure. As you and your spouse are two separate depositors, you and your spouse are each covered up to $250,000 in the joint savings account’s one ownership category (joint). Since the certificate of deposit falls under the second ownership type (single), the depositor (you) is protected for that account up to $250,000.
Too many combinations exist for them to all be covered here. Just be aware that there are ways to guarantee that all of your money is insured. Consider dividing your money over several banks if you think you might come close to or go over the $250,000 cap at any one institution. This will ensure that all of your money is insured.
Identifying The FDIC Insurance Status Of Your Bank
Use the BankFind tool provided by the FDIC to look up your bank and determine whether your deposits are federally insured. On the bank’s website, you can also search for the FDIC insurance logo. For banks that are insured, displaying this logo is a must. To view how the official logo should look, visit the FDIC website.