By: Matthew Hess
With the collapse of Silicon Valley Bank and Signature Bank, and, as I write this today, the extreme volatility of First Republic Bank’s stock price, the conversation of FDIC insurance and its importance has been the topic du jour with our clients.
Why is FDIC insurance important?
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the federal government that provides deposit insurance to protect depositors in case their bank fails. Without it, depositors would lose all their money if their bank were to become insolvent (go bankrupt). Therefore, FDIC insurance is one of the most important factors to consider when choosing a bank. While the vast majority of banks are FDIC insured at the national and regional level, you can check your bank’s status at the FDIC’s BankFind Suite.
The FDIC insures deposits up to $250,000 per depositor, per ownership category in each FDIC-insured bank. Therefore, if you have more than $250,000 with one bank, you would need to spread your deposits across different ownership categories, such as individual accounts, joint accounts, trust accounts, and retirement accounts, to ensure that all your deposits are fully insured.
What are the limitations of FDIC insurance?
It is important to note that not all bank deposits are covered by FDIC insurance. For example, the FDIC does not insure investments, such as stocks, bonds, or mutual funds, even if you bought them through an FDIC-insured bank. Additionally, the FDIC does not guarantee the contents of safe deposit boxes.
It is also important to note that the FDIC does not insure deposits in non-FDIC-insured institutions, such as credit unions or investment firms. Therefore, it is essential to research and choose an FDIC-insured bank to protect your deposits.
How to avoid FDIC insurance limitations?
To avoid the limitations of FDIC insurance, it is essential to choose an FDIC-insured bank and spread your deposits across different ownership categories to ensure that all your deposits are fully insured. You can use the FDIC's Electronic Deposit Insurance Estimator (EDIE) to calculate your insurance coverage based on your specific deposit and ownership information.
Examples of FDIC-insured bank failures
Some banks fail despite the FDIC's efforts to maintain the banking system’s stability. For example, in 2008, during the financial crisis, Washington Mutual Bank was seized by the FDIC and sold to JPMorgan Chase. More recently, in 2020, the FDIC had to take over The First State Bank in Barboursville, West Virginia, and American State Bank in Lubbock, Texas. These are only a few past examples, though we can easily use them to reinforce the importance of choosing an FDIC-insured bank and spreading your deposits across different ownership categories with aim of all of your deposits being fully insured.
In conclusion, with recent headwinds in the banking sector, and interest rate risk touting the economy, utilizing fundamental cash management like spreading deposits across different ownership categories with a FDIC insured bank, depositors can rest easy that their money is safe.
FDIC insurance is an essential factor to consider when choosing a bank.
Williams Asset Management and Commonwealth Financial Network® do not provide legal or tax advice.
This material has been provided for general informational purposes only and does not constitute either investment or tax advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a financial advisor or tax preparer.