March 17, 2020 / 5:37 PM / 16 days ago

Explainer: How your bank deposits are (and aren't) protected

WASHINGTON (Reuters) - In the United States and many other countries, the government guarantees a certain amount of each customer’s deposits in the event of a bank failure, to protect both consumers and the broader financial system.

FILE PHOTO: U.S. currency is seen in this picture illustration taken March 6, 2020. REUTERS/Mike Segar/Illustration

Many other investments, such as stocks, annuities or mutual funds, are not protected from losses.

With the U.S. economy under threat of a recession, here’s the state of play for banks in the United States:

WHAT IS THE U.S DEPOSIT INSURANCE LIMIT?

Currently, the Federal Deposit Insurance Corp (FDIC)guarantees deposits of up to $250,000 per person, per bank. That limit was enshrined in law by the 2010 Dodd-Frank reform law passed following the 2008 financial crisis.

That means, for example, that a married couple sharing a savings account would be guaranteed for up to $500,000 in deposits. It also means that $1 million in savings can be insured if the cash is spread across four different accounts at four different banks. Accounts the FDIC guarantees includes checking and savings accounts, as well as money market accounts and certificates of deposit.

WHAT PROPORTION OF DEPOSITS ARE CURRENTLY INSURED?

Of the $14.5 trillion of bank deposits across the United States at the end of 2019, roughly 60% were insured, according to FDIC data. That means a whopping $5.8 trillion were not insured. The proportion of uninsured deposits fell in the aftermath of the crisis but has crept back up in recent years as people and businesses grew more confident in the economy and the banking system, according to regulatory experts.

WHOSE DEPOSITS ARE NOT INSURED?

Generally speaking, accounts exceeding the $250,000 limit mostly belong to entities that need a lot of cash on hand to make payroll such as small businesses, nonprofits, or municipal governments. Individuals rarely hold funds in excess of the insurance limits, although retirees can be an exception after they close out retirement accounts and move the cash into savings, according to Martin Gruenberg, a former FDIC board chair who still sits on the panel.

WHAT ARE THE RISKS OF UNINSURED DEPOSITS FOR CONSUMERS?

While individuals are at risk of losing their money if a bank fails, the FDIC frequently arranges the sale of an ailing lender to a peer institution, which would then take over all the deposits. If a sale isn’t possible, the FDIC winds the bank down and pays out on the insured deposits. The process typically takes 90 days. Account holders can then can try to recover any uninsured deposits from the failed bank’s liquidated assets.

WHAT ARE THE RISKS FOR BANKS?

For banks, a high amount of uninsured deposits pose their own risks. FDIC research from 2018 shows that account holders with uninsured funds are more sensitive to bad news and more quickly move funds to protect them. That means when a bank is in trouble, it may see money heading out the door when it needs it most.

Generally speaking, regulators do not discourage banks from taking in uninsured deposits, so long as they manage that liquidity risk.

But Gruenberg, a former chair of the FDIC, warned in October that uninsured deposits at larger regional banks could be at greater risk if that bank failed. That’s because there are only a handful of banks big enough to buy a failing regional bank with more than $50 billion in assets. It would then fall to the regulator to wind down the bank, exposing those account holders to losses.

Reporting by Pete Schroeder; editing by Michelle Price and Jonathan Oatis

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