FDIC Insurance Coverage (Sept. 26, 2008)

Ok, I know this is long overdue. As you can imagine, it’s been busy working in the financial services industry. Thankfully, I’m with an organization that hasn’t been involved in the mess you’re seeing in the media. However, since we’re essentially guilty by association, I receive phone calls and e-mails daily from nervous customers.

Before I get into FDIC insurance, I’d be remised if I didn’t address the current financial situation. I’ve read enough about this “financial crisis” to understand most of what’s going on and how it all happened. However, I don’t think I’m really qualified to explain (I’m not a market analyst, economist, etc). Besides, any explanation I give of the current situation will likely include my opinion unintentionally which I try to avoid in my blog. The link below is to a story I read last week that I think helps explain today’s financial situation in plain English.

Glenn Beck’s article: How did we get into this mess?
http://www.cnn.com/2008/POLITICS/09/17/beck.wallstreet/

There are other stories on the internet if you want to learn more about Mortgage-Backed Securities, Collateralized Debt Obligations, and Credit Default Swaps. To understand today’s economic crisis, you must understand these terms and how they interacted to create some of this mess. For the cartoon version, click on the cartoon link on the March 17 blog post.

Now, I’m not going to spend a lot of time on FDIC insurance. Most of my target audience for this blog doesn’t have $100,000 on deposit at a bank. But this has been the hot topic as I receive a number of questions regarding FDIC and the financial strength of banks in general.

First off, the FDIC stands for the Federal Deposit Insurance Corporation. It was created after the great depression to create more consumer confidence in banks by insuring your money would be safe in the event that your bank failed. Just like any insurance policy, there’s a premium banks must pay to insure their customers’ deposits. The current premium is $0.06 for every $1 on deposit.

Do not get confused between a deposit account held at a bank and funds held on deposit at a brokerage firm. FDIC only covers Bank deposit accounts. FDIC does not insure your money market funds held at Edward Jones or Morgan Stanley. If you're not sure you're covered, call your bank or brokerage firm to clarify.

So far in 2008, 13 banks have failed, including Washington Mutual (WaMu), the largest bank to fail in US History. When a bank fails, the FDIC sends a team of officials in to run the organization until all of its assets can be liquidated or written off. If you have a bank account at a bank that has been taken over by the FDIC, a check will be issued to you within a specified time period if your balance is under $100,000. If your balance is over $100,000, they will typically give you a check for the insured amount until all assets of the bank have been liquidated. Once all assets have been liquidated, you could receive the rest of your uninsured money if there’s enough cash left over.

To find out how much of your bank deposits are insured, you can go to the following website: http://www.fdic.gov/edie/calculator.html Depending on account titling, you could be insured for more than $100,000. Coverage is typically for $100,000 per person, per bank. If you have more than $100,000 on deposit at a bank, I urge you to use this estimator to determine exactly how much of your deposits are insured.

Now, even though your deposits may be insured, dealing with a bank that fails is very inconvenient. You can help avoid dealing with this situation by keeping your bank accounts at an institution that is financially strong. There are several factors that go into determining if a bank is financially sound. You can use the link below to determine if your bank is “safe & sound”. Read their rating system explanation before you try to find your bank using their search tool. Most of the financial information used for the current rating is as of the end of the second quarter (June 30, 2008).

http://www.bankrate.com/brm/safesound/ss_home.asp

The FDIC is required to keep on hand approximately 1.25% of insured bank deposits. The 13 bank failures so far this year have depleted the FDIC to approximately 1.01%. According to the ABA (American Bankers Association), the FDIC will most likely raise premiums to $0.07 to $0.08 per $1 on deposit in the near future.

Now, what happens if the FDIC runs out of money? No worry, the US Treasury will step in to fund insured deposits.