How Safe is My FDIC-Insured Bank Account?Personal_Finance / Credit Crisis 2008 Apr 14, 2008 - 01:22 PM GMT
Your bank account may not be as safe as you think (or hope). Taking a deeper look at the legal details and the financial depth of the FDIC reveals several troubling details that call into question how the FDIC would fare during a true banking crisis.
The US is coming out of a period of unusually low banking stress and failures. Since it is typical human behavior to let one's guard down during tranquil periods, we might legitimately ask if this has happened with respect to the FDIC.
Before we address that though, we probably should understand bit more about the FDIC. There's a fair bit of both good and bad information about the FDIC floating around out on the internet, so I thought we could stick to the facts. In this article I even go straight into the language of the 1933 FDIC act itself so that you can decide for yourself whether it's worth spending any of your precious concern on this matter.
What is the FDIC?
Let's begin with a snippet from Wikipedia on the FDIC :
The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933. The vast number of bank failures in the Great Depression spurred the United States Congress into creating an institution which would guarantee deposits held by commercial banks, inspired by the Commonwealth of Massachusetts and its Depositors Insurance Fund (DIF). The FDIC provides deposit insurance which currently guarantees checking and savings deposits in member banks up to $100,000 per depositor.
Accounts at different banks are insured separately. One person could keep $100,000 in accounts at two separate banks and be insured for a total of $200,000. Also, accounts in different ownerships (such as beneficial ownership, trusts, and joint accounts) can be considered separately for the $100,000 insurance limit. The Federal Deposit Insurance Reform Act raised the amount of insurance for an Individual Retirement Account to $250,000.
The two most common methods employed by FDIC in cases of insolvency or illiquidity are the:
• Payoff Method , in which insured deposits are paid by the FDIC, which attempts to recover its payments by liquidating the receivership estate of the failed bank.
• Purchase and Assumption Method , in which all deposits (liabilities) are assumed by an open bank, which also purchases some or all of the failed bank's loans (assets).
In short, if your bank gets in trouble, the FDIC will ride in and either pay off your account (up to $100k), or sell your bank off to another bank which will then assume the usual duties of your bank. Under normal circumstances, a bank failure should not impact you in the least. But these are not normal times. We might reasonably ask how the FDIC would respond during a major banking crisis. After all, this is our money we're talking about. Faith and hope are great at weddings and sporting events, but they should not form the basis of our strategy for handling our finances.
How many bank failures could the FDIC handle at once?
When we take a look at the financials of the FDIC (Figure 1) we see that the level of insurance (in circles below) is not terribly high either, when viewed as an aggregate amount (in blue) or on a percentage basis (in red).
The 1.22% Reserve Ratio means that for every dollar in your bank account, the FDIC has 1.22 cents “in reserve” ready to cover your potential losses. This has proved to be an ample amount during the period of stability we've recently had, but it doesn't seem particularly significant, considering the recent headlines about banking losses (Spring of 2008).
Consider, for a moment, the collapse of Bear Stearns. In order to assume that bank, JP Morgan asked for, and received, a special waiver from the Federal Reserve to keep $400 billion of suspect of Bear Stearn's assets off the books of JPM (page 4 of the linked document). While JPM may have been padding the books a little bit here, due to the uncertainty of how bad the wreckage might turn out to be, $400 billion dwarfs the $52 billion reserves of the FDIC.
If one medium-large bank collapse could wipe out the FDIC by a factor of nearly 8, what do you suppose would happen if there were multiple, simultaneous bank failures? At this point, my guess would be that Congress would be sorely tempted to borrow additional funds to remedy the situation, but I worry that hardship and losses might result while the laws were amended and sufficient funding avenues identified. So how many bank failures could the FDIC endure? The data suggests slightly fewer than one big one.
I thought the FDIC has full faith and credit backing by the US treasury?
Actually, no, it does not. The language in Section 14 of the FDIC Act is clear and unambiguous (emphasis mine):
(a) BORROWING FROM TREASURY.-- The Corporation is authorized to borrow from the Treasury, and the Secretary of the Treasury is authorized and directed to loan to the Corporation on such terms as may be fixed by the Corporation and the Secretary, such funds as in the judgment of the Board of Directors of the Corporation are from time to time required for insurance purposes, not exceeding in the aggregate $30,000,000,000 outstanding at any one time, subject to the approval of the Secretary of the Treasury: Provided, That the rate of interest to be charged in connection with any loan made pursuant to this subsection shall not be less than an amount determined by the Secretary of the Treasury, taking into consideration current market yields on outstanding marketable obligations of the United States of comparable maturities.
Now that's pretty interesting. First, that any additional money from the federal government is not a guarantee, but rather a loan, which will only be made subject to the approval of the Secretary of the Treasury. Further, that the loan is to be made at “current market yields." What do you suppose would happen to US Treasury yields during a true emergency? I can imagine a few scenarios where they might skyrocket, and this would serve to compound the difficulty of keeping the FDIC fund solvent.
How long does the FDIC have to repay me if things go bad?
Here things get murky. We turn to Section 11 of the act and find this (emphasis mine):
(f) PAYMENT OF INSURED DEPOSITS.-- (1) IN GENERAL.--In case of the liquidation of, or other closing or winding up of the affairs of, any insured depository institution, payment of the insured deposits in such institution shall be made by the Corporation as soon as possible , subject to the provisions of subsection (g), either by cash or by making available to each depositor a transferred deposit in a new insured depository institution in the same community or in another insured depository institution in an amount equal to the insured deposit of such depositor.
That only says “as soon as possible” and sets absolutely no time limit or maximum. Taken to the extreme, it might be impossible for the FDIC to ever make depositors whole again, and this is one of dozens of such “outs” that exist in the document. Remember, this act was written in 1933 when money was gold, times were uncertain, and government lawyers were exceedingly careful to avoid locking the government into any possible financial black holes.
And the FDIC Act is very clear to spell out that the only insurance funds available to depositors are those that exist within the fund itself:
(f)(1)(A) all payments made pursuant to this section on account of a closed Bank Insurance Fund member shall be made only from the Bank Insurance Fund
So, if the fund runs dry, there isn't another possible source of funds that can be legally tapped without changing this wording. And that would take – wait for it – an act of Congress.
Surely Congress would appropriate the necessary funds to keep the FDIC solvent?
Here your guess is as good as mine. I would personally expect the US Congress to do everything in its power to the keep the FDIC well funded, especially during an emergency. I would not fault their desire here. But I can also think of a few scenarios or circumstances under which their ability could be taken away. For example:
1. If the banking crisis came at the same time as an interest rate spike and general funding emergency
2. If we were at war with Iran and things were not going well
3. If China suddenly started dumping their Treasury holdings in the opening gambit of an economic war
These would all be times under which I could easily imagine either a lethargic or inadequate response from Congress on the matter.
At my website (free registration req., see The Martenson Report) I offer a few common-sense suggestions of protective actions you might take to insulate your potential losses from a failure of the FDIC system to adequately reinstate your account losses should your bank be among the unlucky ones during this next down cycle.
By Dr. Chris Martenson
Copyright © 2008 Dr Chris Martenson
Dr Martenson is the creator of The End of Money economic seminar series, has extensive experience analyzing and communicating financial information. Dr. Martenson combines a scientist's attention to fact and analysis (PhD, Duke University, Pathology and Toxicology) with a solid understanding of finance and economics (MBA, Cornell, Finance) with strategic thinking (4 years as a management consultant) to produce an insightful and powerful lecture. He is currently devoted to researching, writing and presenting economic and financial analyses delivering his message via his website, lecture series and is currently working on a related book & movie.
Dr. Chris Martenson Archive
© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.
27 Jun 08, 10:36
FDIC insured banks
How many FDIC insured banks are there in the U.S.?
27 Jun 08, 21:41
FDIC Insured Banks
A. Hamilton Daye
16 Jul 08, 19:34
FDIC alternative limits?
My bank told me that I was allowed to leave sums greater than $100,000.0 in my accounts because they were 'beneficiaries' accounts, Payable On Death" or POD to my beneficiaries upon my death. This statement is separate from the IRA account for $250,000.00. Have you ever heard about this? If true, where can I get information concerning this?
17 Jul 08, 00:59
FDIC Alternative Limits
Revocable Trust Accounts
These are deposits held in either payable-on-death (POD) accounts or living trust accounts.
Payable-on-death (POD) accounts – also known as testamentary or Totten Trust accounts – are the most common form of revocable trust deposits. These informal revocable trusts are created when the account owner signs an agreement – usually part of the bank's signature card – stating that the deposits will be payable to one or more named beneficiaries upon the owner's death.
Living trusts – or family trusts – are formal revocable trusts created for estate planning purposes. The owner of a living trust controls the deposits in the trust during his or her lifetime.
Note: Determining coverage for living trust accounts can be complicated and requires more detailed information about the FDIC's insurance rules than can be provided in this publication. If you have a living trust account, contact the FDIC at 1-877-275-3342 for more information.
Deposit insurance coverage for revocable trust accounts is based on each owner's trust relationship with each qualifying beneficiary. While the trust owner is the insured party, coverage is provided for the interests of each beneficiary in the account. The FDIC insures the interests of each beneficiary up to $100,000 for each owner if all of the following requirements are met:
The beneficiary is the owner's spouse, child, grandchild, parent, or sibling. Adopted and stepchildren, grandchildren, parents, and siblings also qualify. In-laws, grandparents, great-grandchildren, cousins, nieces and nephews, friends, organizations (including charities), and trusts do not qualify.
The account title must indicate the existence of the trust relationship by including a term such as payable on death, in trust for, trust, living trust, family trust, or an acronym such as POD or ITF.
For POD accounts, each beneficiary must be identified by name in the bank's account records.
If any of these requirements are not met, the entire amount in the account, or any portion of the account that does not qualify, would be added to the owner's other single accounts, if any, at the same bank and insured up to $100,000. If the revocable trust account has more than one owner, the FDIC would insure each owner's share as his or her single account.
Note: The following example applies to POD accounts only. Coverage may be different for some living trusts.
Example: Bill has a $100,000 POD account with his wife Sue as beneficiary. Sue has a $100,000 POD account with Bill as beneficiary. In addition, Bill and Sue jointly have a $600,000 POD account with their three children as equal beneficiaries.
Account Title Account Balance Amount Insured Amount Uninsured
Bill POD to Sue $ 100,000 $ 100,000 $ 0
Sue POD to Bill $ 100,000 $ 100,000 $ 0
Bill & Sue POD to 3 children $ 600,000 $ 600,000 $ 0
Total $ 800,000 $ 800,000 $ 0
These three accounts totaling $800,000 are fully insured because each owner is entitled to $100,000 of coverage for the interests of each qualifying beneficiary in the accounts. Bill has $400,000 of insurance coverage ($100,000 for the interests of each qualifying beneficiary – his wife in the first account and his three children in the third account). Sue also has $400,000 of insurance coverage ($100,000 for the interests of each qualifying beneficiary – her husband in the second account and her three children in the third account).
When calculating coverage for revocable trust accounts, be careful to avoid these common mistakes:
Do not assume that coverage is calculated as $100,000 times the number of people –owner(s) and beneficiary(ies) – named on a trust account. Coverage is provided for the interest of each qualifying beneficiary named by each owner. Additional coverage is not provided to the owners for naming themselves as owners. For example, a father's POD account naming two sons as equal beneficiaries is insured to $200,000 only -- $100,000 for the interest of each qualifying beneficiary.
Do not assume that the FDIC insures POD and living trust accounts separately. In applying the $100,000 per-beneficiary insurance limit, the FDIC combines an owner's POD accounts with the living trust accounts that name the same beneficiaries at the same bank.
14 Sep 08, 08:12
Greg - FDIC only insures accounts up to $100,000
The thing that Mr Martenson fails to take into account is that FDIC only insures accounts up to $100,000.
So although BS might have had $400 billion in "suspect assets", what exactly does that mean? If these are mostly bad housing loans--- well, FDIC has NOTHING To do with protecting THAT money anyway!
So, I think his arguments are missing a few main points:
(1) FDIC only insures up to $100,000
(2) FDIC does NOT insure bad BANK assets-- including bad loans the BANK might have made. It only insures individual accounts.
So, even though BS might have had $400 billion in "suspect assets," that does not mean FDIC is on the hook for anywhere NEAR that amount.
14 Sep 08, 14:27
Insurance is one thing accessibility is another. You are likely to be told to wait for quite awhile to receive anything from the FDIC-Indy-Mac customers were told this. What happens when the many banks fail at once? Or the FDIC needs more funds from Treasury? Most likely a combination of the two. Will congress need to approve any special funding? Can you afford to wait while Barney Frank,Chris Dodd,Wrangel and Schumer Pontificate and get their face-time? Can your children? WILL your credit card company,for that matter your stomache? You bet on these jokers you will come-up snake-eyes. If you think I am exaggerating then you STILL have not learned your lesson and the rules are-the money stays with those who DESERVE to have it,not EARNED it. Looking forward to more of your yummy IRA Money..............Mr. Burns.
18 Sep 08, 23:50
Should we panic?
I am a novice when it comes to banking system, money market, wall street .. etc... I have couple of saving accounts spread around couple of banks, all under $100k, Should I panic and pull money out of the saving accounts from banks that are in trouble, like WaMu? If so, where can we place the money so it won't lose value? Any option beside under the matress?
20 Sep 08, 18:41
CDs and FDIC insurance
My wife and I have several CDs, some over 100k. We have been told by the banks that out different accounts, including the CDs are FDIC insured up to 200k in each different bank.
is this true!!!!
09 Oct 08, 09:46
CD's and credit unions
Can I lose my investment in my CD's in different banks? Should I put money into my safty deposite box or would it be available during a bank crash? Are the credit unions as safe as FDIC?
09 Oct 08, 11:55
Financial Safety During Bank Busts
See article just published copied below -
Since so many of the financial community talk endlessly about where to invest, it always seems good to focus on the issue of financial safety. In my view, way to much emphasis is given to getting investing ideas, and little to how to keep what you have. Lots of people get caught in that.
It doesn't help that the financial media, like CNBC is always saying ‘how can you play this' or where would you invest in this situation. There certainly is nothing wrong with that, and surely CNBC wants to be relevant and useful to their massive world audience. But, aren't there times where the clearest strategy is what NOT to do?
But financial professionals make money by selling various investments, where they make a commission. There is just little incentive to encourage a person to put his money in a safe place and park it for a while. So, we never hear about that (or rarely).
Stay for the long term paradigm
One of the most dangerous investing paradigms we hear over and over and over is that a person should stay in the stock market because its average gains over 100 years or something is like 10 or 12% (they say). These stay forever people say if you get out of markets when they drop, you end up selling at bottoms, and if you were to stay with it, the market recovers …etcetera.
But of course, when the markets are facing a huge crash, this concept of hanging in there wears a bit thin. If you look at what happened to stocks in 1929 worldwide, or the US, the stock market dropped over 90% in a couple of years, and began the Great Depression in the US that lasted 10 painful years. Stocks did not start to really recover till the mid 1950's.
So, if people followed that logic of staying in for the long term, they were basically wiped out. I think that it's clear that the idea of always hanging in markets looking for the ‘long term' is a bogus and self serving idea for the brokerage industry.
The Yield paradigm
Then we can consider what I call the Yield paradigm. (A paradigm is a deeply held way of thinking about something, which often you don't even realize.) The Yield paradigm is that, if you have money it always has to be ‘working'. The person cannot sit still if it's not ‘always working'. This one keeps a lot of people out of gold longer than they should. It also keeps people in dangerous markets way too long for their own good.
The Yield paradigm is also a reason many people stay in the stock markets, as they believe that they should never let their money sit ‘idle'. This paradigm works well together with the ‘stay in the market long term' paradigm, and it again keeps people in markets when, perhaps, they should be out in cash or something (or gold coins in possession).
Now, Jesse Livermore, one of the greatest stock speculators of all time, stated in his books that there were clearly times to be totally out of the markets, in cash, and just go fishing. (He had a big motor yacht in the Gulf and he would literally go fishing for months when he was out of the markets).
Jesse Livermore NEVER stated that one should always be in the markets because they ‘give an average return of 12% long term'. He knew that was bogus.
But, the logic of that ‘be in markets for the long term' paradigm is very seductive. And, when people end up taking huge losses in stock crashes they inevitably return to that seductive idea, to comfort themselves. And, what really bothers me, is to see financial professionals and media repeating over and over that ‘stay in markets long term and don't get out' mantra, all the while people are losing a fortune.
So, let's dispense with that idea about always staying in markets because that is horse shit.
Cash, CDs, and gold coins
Our next point is to compare cash, CDs and gold coins. Once one frees his mind from the two paradigms we discussed above, then he has to find a place to sit ‘in cash' whilst he waits out the market crashes. Of course, one of the biggest problems right now is that banks and brokerage accounts are not all that safe. There is the issue of bank runs and so on.
Personally, I would think the safest way to keep your cash (not having institutional risk) is at home in a safe (which you don't tell people about!). Of course, lots of people get nervous doing that. And you won't get interest. But you can't have it both ways. In this case, one might choose a middle of the road approach, and half here and half there.
The most secure cash would be a gold coin. OF course, a gold coin does not earn ‘interest' and this key issue trips up many who would or maybe should go out and get a gold coin or two. Inevitably, when there is a currency crisis, they end up panicking and trying to get some gold or silver when its too late and not one will sell it.
I do not like safe deposit boxes because the government can lock you out of them. Bank ‘holidays' can also lock you out from your cash just when you need it most.
Then, we get to what is becoming one of my favorite topics, the tax deferred retirements. I am coming to believe that these vehicles are particularly inappropriate for the longer term in the US and elsewhere. Putting aside the clearly self serving motives of the brokerage industry in creating these (with tons of lobbying), the inevitable collapse of the USD would likely wipe out most tax deferred retirements.
If the USD was not in such danger, perhaps the tax deferred retirements would be all right going forward. But, I do not personally believe these that safe for the next 5 or so years. The risk of a USD crisis is all too real.
Another thing about tax deferred retirements is that I am certain that, in a big US financial crisis, they will go after any remaining big pools of money, and guess what the biggest and most obvious target will be? Those juicy $trillions of ‘tax deferred' retirements! They likely will double taxes on taking any money out of them in a real US economic emergency. If that happens, as I suspect, so much for the tax deferral savings!
So, in effect, you are saving for the government and not so much for yourselves, like you were led to believe. Now, this is my assertion, not a certainty.
I have a friend who bought quite a bit of California tax exempt revenue bonds. He worked for years saving a couple million at two teaching jobs. Now, with California in a huge financial mess (again) his bonds have lost 20% of their value, though they are not defaulted. Of course now, he is very reluctant to sell the bonds, as maybe he should, due to the 20% hit. He then will end up taking a lot of risk going forward, as California is ground zero of the real estate collapse. As the bonds fall further in value, it becomes harder for him to sell them.
California's budget will be a disaster for years going forward. In fact, they just made a request for a big loan from the US government so they can pay their bills in coming months.
I give this example because this guy's issue is the same for many people. The reason he is in the tax exempt bonds is to get yield. And, now he is facing some real risk of losing the money altogether. Once again, always insisting on getting yield (the yield paradigm) is a dangerous thing to do.
Return OF capital
Perhaps he would be far better to get a bunch of CDs within the insurance limit. He would not get as much yield, but has a much lower chance of losing his money. I know what I am saying is obvious, but there are a lot of people in this situation. Moving to lower yield to reduce risk is what must be done today, in my opinion. PIMCO's chief El Arian just stated the real issue right now is return OF capital, not return ON capital. He is right.
In fact, that exact problem, return of capital is the main source of the world credit crisis.
Now, at this moment, the US stock market has not lost over 50%, like many foreign markets have recently. (China for example down over 60%). So, perhaps it's timely for you to take a good look at your thinking, and see just how deep those two paradigms are in you. Many times, we don't even realize how deep a paradigm has ingrained itself into our thinking. You need to find this out. You have to examine yourself…
We have a nice survival edition of our newsletter out this week. Stop by and have a look.
By Christopher Laird
Copyright © 2008 Christopher Laird
Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.
20 Jul 12, 14:59
Bank fees and NSFs
we have been with our,local bank for about 23 years, once you get behind and they start charging NSFs it is so hard to get caught back up, our bankd charges $32.00 dollars a check over a certain amount, plus $5.00 a day for each NSF over 3 days, we have paid in the past few years no doubt several $1000s of dollors tring to stay ahead, are banks allowed to charge that much, we borrowed money to keep from getting NSFs, but by the the time we was trying to get on track, they pop up again, where and can we get help in this or least some reemberasment?