Know the details of deposit insurance
Some bank customers needlessly fret about FDIC coverage
Some Western New Yorkers are worrying about banks again.
It’s been 20 years since the failures of Goldome and Empire of America in Buffalo, but memories of those catastrophes are still fresh in consumers’ minds.
So it’s little surprise that as large national banks — like KeyCorp, Citigroup and National City Corp. — report billions of dollars in losses, and after regulators two weeks ago closed California’s IndyMac Bancorp and on Friday closed two more western banks, consumers are asking if their money is safe.
Enter the FDIC.
As most people know, the Federal Deposit Insurance Corp. insures up to $100,000 per depositor per bank, providing a significant guarantee that people will not lose their savings in the unlikely event of a bank failure.
“No insured deposit has ever been lost at any bank, so customers at M&T or any FDIC-insured bank can rest assured that their insured deposits are safe,” said C. Michael Zabel, spokesman for Buffalo’s M&T Bank Corp., a Top 20 bank.
But, consumers are wondering, just what does that really mean? How far does that go? What happens if too many banks fail? How can I protect the rest of my money?
“There’s no question that Indy- Mac heightened the level of general anxiety at a time when you’ve got a market at large that’s skittish,” said John R. Koelmel, CEO of First Niagara Financial Group. “That creates some noise and chatter.”
Bankers here say there’s been no unusual withdrawal activity. No one’s rushing to carve storage spaces under their mattresses.
“I don’t think there’s a panic here. I think most of the guys are looking for the knowledge,” said one consumer, 76-year-old George John of Williamsville, who was pondering the banking crisis with friends over breakfast at McDonald’s.
But the ongoing parade of bad news from banks is nevertheless taking its toll on consumer confidence in the industry, and even the government. And that’s forcing officials to field all kinds of questions as they seek to reassure their customers.
“We’ve had a fair amount of people coming in to ask about FDIC insurance and the bank itself,” said LuAnne Kingston, senior vice president and Western New York regional market executive for HSBC Bank USA.
The FDIC was established as an independent agency in 1933 after millions of people lost their savings when more than 10,000 U. S. banks failed during the Great Depression.
Its core mission is to provide federal deposit insurance for banks, backed by the “full faith and credit” of the U. S. government, so that customers will be repaid if a bank fails.
Because of that role, it also has primary federal regulatory authority over most state-chartered banks, and is a secondary regulator for others. That way, it can ensure that the banks operate “safely and soundly” and meet certain standards, so that the insurance is not needed.
“The banking system in this country remains on a solid footing through the guarantees provided by FDIC insurance,” FDIC Chairwoman Sheila Bair said Thursday in a release announcing a depositor’s Bill of Rights.
“The overwhelming majority of banks in this country are safe and sound and the chances that your own bank could fail are remote. However, if that does happen, the FDIC will be there — as always — to protect your insured deposits.”
What’s covered; what isn’t
Under federal law:
• The FDIC insures the balance of a depositor’s checking, savings, money market, NOW and certificate of deposit accounts up to the insurance limit, with principal and interest.
• Any person or entity can be covered, even if they are not a U. S. citizen or resident.
• Unpaid cashier’s checks, interest checks, money orders or expense checks from an insured bank are also covered, with the FDIC adding them to other deposits owned by that customer.
• The agency does not cover safe deposit boxes or insure investments in stocks, bonds, mutual funds, life insurance, annuities or municipal securities, even if sold by an insured bank.
• It doesn’t protect a bank’s creditors or shareholders.
*•nd it doesn’t insure U. S. Treasury bills, bonds or notes, which are backed by the government.
Since 1980, the insurance limit has been $100,000 for each depositor at each institution. That means all accounts of a customer at a given bank are added together — even if they were set up at different branches.
However, accounts for the same person at a different bank are insured separately. Also, two banks that are separately chartered but under the same parent holding company are distinct for insurance. But a bank’s Internet division, even under a different name, is not.
So, if you have $100,000 in one account, you’re fully covered. But if you have $75,000 in one account and $50,000 in another, at the same bank, then $25,000 is not insured.
Retirement accounts such as IRAs are now insured up to $250,000 per customer per bank. That applies only to bank deposits in such accounts, however, not to investments.
Still, there are ways around the limits. Accounts titled in different ways can get separate insurance at the same bank.
For example, a single account in your name can be fully covered on top of a joint account owned by both you and your spouse. A revocable trust account is considered a different category, as are retirement accounts.
A joint account owned by two people can be covered up to $200,000, as each person’s share of the account is insured up to $100,000, if that’s their only account at that bank. But changing the order of names on a joint account or using a different co-owner’s Social Security number does not help.
If a bank does actually fail, the FDIC will pay off insured depositors within a few days of a bank’s closing, either with a check or by opening an account at another bank. Depositors with uninsured balances, on the other hand, could wait years to be fully repaid, as the amount they receive periodically depends on how much the FDIC gets for selling the failed bank’s assets.
Today, the FDIC insures more than $4.43 trillion of the $7.07 trillion of total deposits in the U. S. banking system. But it has not had to pay out much in recent years. Since the end of 2002, only 17 out of 8,494 banks nationwide have failed — mostly small banks — and there were no failures in 2005 or 2006.
However, the FDIC does maintain a confidential list of “troubled” banks which are most at risk, although only about 13 percent of those on the list usually fail in the end, the FDIC’s Bair said in a speech last week. That list 90 institutions on it at last count, up from 76 in the fourth quarter of last year and 47 in the third quarter of 2006.
It’s the largest number since the third quarter of 2004, but a far cry from more than 1,000 in 1992. An updated tally will be released next month, although the names are not released to prevent a “run” on those banks.
Under federal law and its own internal determination, the FDIC must keep in its insurance reserve an amount equal to $1.25 for every $100 of insured U. S. deposits to cover losses. To build up that Deposit Insurance Fund, the agency charges all banks premiums based on certain factors, including how risky their business is. Right now, those premiums range from 5 cents to 43 cents for every $100 in insured deposits.
As of early this month, that insurance fund had about $53.6 billion in it. However, on July 11, regulators closed Pasadena, Calif.-based IndyMac Bank in the second-biggest bank failure in U. S. history. IndyMac had not even been on the troubled bank list, and its closing will cost the FDIC between $4 billion and $8 billion.
Two banks fail on Friday
On Friday the FDIC shut 1st National Bank of Nevada and First Heritage Bank, which had operated
in Nevada, Arizona and California. The banks, owned by Scottsdale, Ariz.-based First National Bank Holding Co., will reopen on Monday as Mutual of Omaha Bank branches.
As of June 30, the two banks had total assets of $3.6 billion.
The FDIC said the takeover of the two banks was the least costly resolution and all depositors — including those with funds in excess of FDIC insurance limits — will switch to Mutual of Omaha with “the full amount of their deposits.”
In the IndyMac closing, in contrast, depositors with money over the insurance limit were out of luck.
With the economy not expected to improve soon, the FDIC now projects more bank failures, and will likely raise premiums on banks to replenish the insurance fund, Bair said.
But even in the event that the insurance fund is depleted, the FDIC also has a $40 billion line of credit from the Treasury Department. And the U. S. government has pledged its full backing as a last resort — which, of course, means taxpayers.
However, “that’s a very unlikely scenario,” said FDIC spokesman Andrew Gray. “That’s a lot of money to go through. We feel confident we have the resources to recapitalize if necessary.”
Meanwhile, bankers are working to answer customers’ questions, educate them about the FDIC, and calm frayed nerves. They’re also encouraging customers to look at alternatives to structure their accounts to maximize their insurance coverage.
“We spend quite a bit of time educating our clients about the FDIC,” HSBC’s Kingston said. “We’ve been able to make our customers feel comfortable as they walk out the door.”
