Banking, Crisis and the FDIC Insurance Limits

| April 3, 2023 | 0 Comments

In my 25 plus years working in investment management, it’s fortunately rare that I have to discuss the FDIC and bank account insurance limits with clients. Unfortunately, that has become a pretty common topic the past few weeks. The failure of Silicon Valley Bank, Signature Bank and Silvergate Bank all in the same week brought back stark reminders of the 2008 financial crisis which was punctuated by what seemed like weekly failures of multiple banks.

And I’d like to begin by saying that I don’t think the current banking crisis rises to the level of the Great Financial Crisis of 2008. Each of the banks that failed recently appear to have been the result of a combination of aggressive banking, poor risk management and lax oversight by bank regulators. More importantly, the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve have acted aggressively to calm depositor concerns. One of the main ways that they’ve done this is to guarantee even uninsured deposits at the banks.

So let’s begin with what normal FDIC insurance looks like. FDIC insurance limits are a bit complicated, but basically each depositor is insured up to at least $250,000 per bank.

  • Checking, savings, money market and CD accounts are combined to determine the amount covered by FDIC insurance. The total of these accounts is insured up to $250,000. So if you have $150,000 in savings and $150,000 in personal checking at the same bank, you would have $50,000 of uninsured deposits at that bank.
  • If you have a joint account with someone, that is separate from your individual accounts. So you could have up to $250,000 of insurance on your accounts and an additional $250,000 on joint accounts with your spouse.
  • Individual retirement accounts (IRAs) are also separated from other accounts, so you can have up to $250,000 on IRAs held at banks.
  • Trusts and business accounts get much more complicated. (Revocable) living trusts are insured up to $250,000 for each current beneficiary.

There’s a lot more information and detail on the FDIC website.

There’s another way to get even more FDIC insurance. There are two networks that banks can access to increase FDIC insurance coverage on CDs and deposit accounts.

CDARS (Certificate of Deposit Account Registry Service) allows participating banks to spread CD deposits out across multiple banks. Your account at your bank will show each of the CDs you own and the other banks that have been used to ‘spread out’ your deposits.

ICS (Insured Cash Sweep) is a newer service, similar to CDARS, but for deposit accounts. According to Darlene Mera of CalPrivate Bank, you can insure up to $100,000,000 across roughly 4,000 member banks. Like CDARS, you’ll see the list of banks and the amounts deposited at each on your statement from your bank. One catch is that the interest rate you’ll receive has to be agreed upon by each bank, so it is likely to be the lowest common denominator across all of the banks used to spread your accounts around. Also, you can rule out some banks (for example, banks where you might have other deposits), but you can’t select the banks you want to use. That’s done by the network. Also, while there are no explicit fees, the interest rate you receive may be lower than the bank’s stated interest rate, representing a cost to access the service.

Normally, you would have to have accounts at multiple banks to gain FDIC insurance on very large deposits. The CDARS and ICS programs allow participating banks to offer higher FDIC insurance, but with some limitations and fees.

For now, the Federal Reserve has made it easier for banks to borrow money to return cash to their depositors. This should help stabilize the system in the short run. If you are concerned about your deposits, you may want to look at how your accounts are titled and whether your bank offers one of these deposit network service.

This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is director/investment Management with Blankinship & Foster, LLC, a wealth advisory firm specializing in financial planning and investment management for people preparing for retirement. Brooks can be reached at (858) 755-5166, or by email at Brooks and his family live in Mission Hills.

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