What do you need to know about FDIC?

In just three days’ time, SVB and Signature Bank, $209 billion and $16.5 billion in assets respectively, had closed for good. On March 10, Silicon Valley Bank (SVB) collapsed and on the same day, Signature Bank customers, apparently alarmed by the collapse of SVB, withdrew more than $10 billion in deposits. By March 12, Signature Bank had permanently closed.

By March 13, both banks had essentially been taken over by the federal government. The U.S. Department of Treasury, the Federal Reserve and the FDIC indicated they would back SVB deposits beyond the federally insured ceiling of $250,000. The full details of why these banks collapsed are still being investigated.

So, what do you need to know about FDIC and what happens if you or your business is in that unfortunate situation?

FDIC Fundamentals

The FDIC was founded in 1933, in the wake of massive bank failures during the Great Depression. FDIC coverage protects up to $250,000 per depositor, per bank, in each account ownership category. The protection extends to any person, regardless of citizenship, or entity with funds in an insured bank.

The FDIC protection covers:

• Checking accounts,
• Negotiable order of withdrawal (NOW) accounts,
• Savings accounts,
• Money market deposit accounts (MMDA),
• Time deposits such as certificates of deposit (CDs), and
• Cashier’s checks, money orders and other official items issued by a bank.

If a person holds deposits in separate, insured banks, each account is covered up to $250,000. However, if funds are deposited in separate branches of the same insured bank, they aren’t separately insured.

FDIC coverage protects depositors against institutional failures. Stolen or lost deposits will generally result in a loss to the bank, not its customers. In many instances, losses will be covered by a so-called “banker’s blanket bond.” This is an insurance policy that a bank purchases to protect itself from causes of disappearing funds, such as theft, fraud, fire and other natural disasters. Unauthorized access to funds may be covered by the Electronic Funds Transfer Act and other consumer protections.

The FDIC does not cover:

• Stock investments,
• Bond investments,
• Mutual funds,
• Crypto assets,
• Life insurance policies,
• Annuities,
• Municipal securities,
• Safe deposit boxes or their contents, and
• U.S. Treasury bills, bonds or notes (although these are backed by the federal government).

There may be other protection for the assets above. The Securities Investors Protection Corporation (SIPC) is a nongovernment entity that replaces missing stocks and other securities in customer accounts held by its members up to $500,000, including up to $250,000 in cash, if a member brokerage firm fails. This coverage does not protect investors against decreases in the market value of investments.

Ownership Categories

There are also federal rules regarding funds depositors have in different categories of legal ownership. These ownership categories include:

• Single accounts,
• Certain retirement accounts,
• Joint accounts,
• Revocable trust accounts,
• Irrevocable trust accounts,
• Employee benefit plan accounts,
• Corporation, partnership and unincorporated association accounts, and
• Government accounts.

In terms of ownership categories, a bank customer with multiple accounts may qualify for more than $250,000 in FDIC coverage if the customer’s funds are deposited in different ownership categories and the requirements for the ownership categories are met.

For example, Mr. Smith has four single accounts at Savers Bank, a hypothetical insured bank, including one account in the name of his business (a sole proprietorship). The FDIC covers deposits owned by a sole proprietorship as a single account of the individual owner. So, in this situation, the FDIC would combine Mr. Smith’s four accounts. If the deposits in these accounts total $260,000, the FDIC would cover up to $250,000, with $10,000 uninsured.

On the other hand, Mr. and Mrs. Johnson hold multiple accounts at Savers Bank:

• An MMDA worth $230,000,
• A savings account with a balance of $250,000, and
• A CD worth $270,000 (with a third co-owner listed on the account).
• The Johnsons’ deposits at Savers Bank total $750,000. To calculate FDIC coverage, the total amount in each joint account is divided by the number of co-owners. So, Mr. and Mrs. Johnson each have the following account balances:
• An MMDA worth $115,000 (half of $230,000),
• A savings account with a balance of $125,000 (half of $250,000), and
• A CD worth $90,000 (one-third of $270,000).

Therefore, each of their deposits at Savers Bank totals $330,000. The FDIC would cover $250,000 each, leaving an uninsured balance of $80,000 each. Assuming the third owner listed on their CD has no other accounts at Savers Bank, his or her ownership share of the CD ($90,000) would be fully insured.

If Your Bank Fails

If you have deposits in an FDIC-insured bank that fails, you don’t need to apply for or buy FDIC deposit insurance. Coverage is automatic. If you’re unsure if your bank is FDIC-insured, ask a bank representative or use the FDIC’s BankFind Suite tool.

Historically, the FDIC pays insurance within days after a bank closing, often by the next business day. This is done by either providing each depositor with a new account at another insured bank in the amount equal to the insurance balance or by issuing a check to each depositor.

In the case of SVB, the FDIC transferred all deposits — both insured and uninsured — and substantially all assets of the former SVB to a newly created, full-service FDIC-operated bridge bank. This action will protect all depositors of SVB, even those with more than $250,000 per depositor in each account ownership category.

Similarly, according to a press release, the FDIC transferred all deposits and most of the assets of Signature Bank to Signature Bridge Bank, N.A., “a full-service bank that will be operated by the FDIC as it markets the institution to potential bidders.”

Both banks are offering full coverage protection of deposits, with no losses associated with the collapses being “borne by the taxpayer,” according to a joint statement on March 12 by Secretary of the U.S. Department of Treasury Janet Yellen, Federal Reserve Board Chair Jerome Powell and FDIC Chairman Martin Gruenberg. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

Although the “systemic risk exception” covers depositors, the joint statement added that shareholders, certain unsecured debtholders and bank senior management won’t be protected.

Covering Your Assets

In light of the recent bank failures, it may be prudent for individuals and business owners with significant account balances to divvy up their deposits between multiple account ownership categories and/or banks. Or you might decide to add another person’s name to an account, such as a business partner, spouse or child.