Headlines about recent bank failures may have depositors feeling uneasy about their money and questioning how much control they really have over their deposits once they drive off from the bank. Below, are five steps that depositors can take to better protect themselves and their funds in today’s financial climate.
- Verify that the bank is insured by the Federal Deposit Insurance Corporation (FDIC): Depositors can check the bank’s website or contact the FDIC directly to verify that the bank is insured by the FDIC. Look for terms such as “Member FDIC,” or, “Insured by the FDIC”.
The FDIC insurance program was created in 1933 and is designed to protect depositors in case their bank or savings institution fails. In the event of a failure, the FDIC steps in to ensure that depositors receive their money back, up to a certain amount. FDIC insurance is backed by the full faith and credit of the U.S. government. For banks that are insured by the FDIC, insurance is automatic and does not require any action on the part of the depositor. This means that if you have a deposit account at an FDIC-insured bank, your deposits are automatically insured up to the insurance limit, including any earned interest.
- Keep deposits within the insured limit: Depositors should keep their deposits within the FDIC-insured limit of $250,000 per depositor, per insured bank, per ownership category. This means that if a depositor has more than $250,000, they should spread their deposits across multiple insured banks to ensure that all deposits are protected.
The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. This means that if you have a checking account, a savings account, and a certificate of deposit (CD) at the same bank and under one name, you are insured up to $250,000 for all accounts. If you have joint accounts with another person, those accounts are also insured up to $250,000 per co-owner and per insured bank, for each account ownership category.
A similar option for meeting the insured limit threshold is the Certificate of Deposit Account Registry Service (CDARS). CDARS is a program that allows depositors to access FDIC insurance coverage for large deposits exceeding the $250,000 limit. CDARS is offered by some financial institutions and works by splitting a large deposit into smaller amounts and placing them in multiple banks within the CDARS network. Each deposit is then insured up to the $250,000 FDIC insurance limit. By using CDARS, depositors can access FDIC insurance coverage for large deposits without having to open accounts at multiple banks or manage statements and interest payments. However, CDARS may not be available at all financial institutions, and there may be fees or restrictions associated with using the program.
- Monitor the bank's financial health: Depositors should monitor the financial health of the bank they are using. This can be done by reviewing the bank's financial statements and ratings from independent rating agencies.
Financial health is a measure of soundness for a bank. This includes components like capital adequacy (a bank’s cash reserves), asset quality (the quality of a bank’s loans and assets), management (how the bank is functioning day-to-day), earnings (a bank’s ability to generate earnings), liquidity (a bank’s ability to meet short-term obligations) and sensitivity (how sensitive a bank’s earnings are). Depositors can and should shop around for a bank that meets their needs and is financially healthy.
- Diversify deposits: Depositors should consider diversifying their deposits across different types of accounts, such as checking, savings, and CDs to reduce the risk of loss in case of a bank failure.
FDIC insurance covers all types of deposit accounts, including checking accounts, savings accounts, money market accounts and CDs. It does not cover other types of financial products such as stocks, bonds, mutual funds, or annuities. This means that diversifying deposits can protect against a total loss in the event of a failure at one bank.
- Consider alternative banking options: Depositors may want to consider alternative banking options, such as online banks or credit unions, which may offer higher interest rates and lower fees, in addition to FDIC insurance.
Alternative options include but are not limited to National Credit Union Administration (NCUA) Insurance and Private Deposit Insurance. NCUA is an independent agency of the U.S. government that provides insurance coverage for credit union deposits. Similar to the FDIC, NCUA insures deposits up to $250,000 per depositor, per insured credit union for each account ownership category. Private deposit insurance is offered by some banks and credit unions as an alternative to FDIC or NCUA insurance. Private deposit insurance is provided by private insurers and is not backed by the federal government. It may offer higher insurance limits or additional coverage beyond what is available through the FDIC or NCUA. While alternative options may provide additional protection, they may also carry additional risks or costs. Depositors should carefully research and evaluate any alternative options before choosing to rely on them for deposit protection.
Ultimately, it is important for depositors to be aware of the risks associated with bank closures and to take steps to protect their funds. By verifying that the bank is insured by the FDIC, keeping deposits within the insured limit, monitoring the bank's financial health, diversifying deposits, and considering alternative banking options, depositors can help to ensure the safety and security of their deposits.