You see the sign at nearly every bank teller window and ATM screen — “FDIC insured.” But what is the FDIC and is it important to know a bank has this coverage?
FDIC stands for Federal Deposit Insurance Corporation. It was created by Congress in 1933 in the aftermath of the 1929 stock market collapse.
The purpose of the FDIC is to give depositors confidence in the U.S. banking system. Money in bank account is insured by the FDIC up to $250,000 per owner, per account.
That means you can have $250,000 in a savings account and another $250,000 in a retirement account in one bank and you are covered for the entire half-million. However, if you have $200,000 in a bank account and a CD worth $100,000 in the same account, that’s $50,000 of exposure.
If you have $200,000 in one bank and $100,000 in another bank the entire amount is covered. Some savers use multiple banks for this reason. In addition, a joint account enjoys up to $500,000 in coverage, since it has two owners. You can use this FDIC tool to figure out if your savings is covered completely.
Exposure to what? Essentially, from a bank run. Back in the 1930s, confidence in the banking system was in tatters, leading to runs on the bank. In a bank run, depositors who fear losing their money literally run to a branch and take out cash.
That behavior then forces the bank to fail, even if it wasn’t at risk in the first place. By providing coverage in an amount that covers the large majority of bank customers the government is supporting the bank industry and encouraging depositors.
When a bank does fail due to mismanagement, and it does happen from time to time, regulators swoop in on a Friday, clean up the books and get another nearby bank to take on the deposits. If any depositor money is made good thanks to the FDIC coverage.
On Monday, the depositors are told their money is safe at being held and a new bank, thus avoiding a panicked run to withdraw.
Credit unions have similar coverage in the same amount, from the National Credit Union Administration (NCUA).
Increasingly, if you hold cash in a brokerage account you can access FDIC coverage through what’s called a sweep system. The brokerage uses banks to hold your cash so it is insured, but you can move money as need be at the brokerage website, even write checks and carry a debit card from the brokerage.
If your balances tip over the FDIC limit the brokerage automatically “sweeps” the difference into a second or third bank, maintaining your insurance coverage. Basically, it takes the work out of keeping up with several banks in cases where you have significant cash.
While it’s common to see FDIC signage at a bank and on marketing materials, always be sure there is coverage before depositing.
Remember, too, that investments through a bank can lose money in the market. Investment losses are not insurable, even if the investment is held in an insured account.
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