The Coronavirus Aid, Relief, and Economic Security (CARES) Act that unanimously passed the Senate has a few little-known provisions that will likely be of interest to savers. The well-known provisions have been discussed at length by the media. These include the $1,200 tax rebates to most individuals, expanded unemployment benefits, billions of dollars for state and local governments and hospitals, and billions of dollars in loans for small and large businesses. The total cost of this package is close to $2 trillion. The bill is expected to pass the House on Friday and be signed by President Trump soon after House passage.
One small and little-known provision of the CARES Act covers federal deposit insurance. In summary, it temporarily provides unlimited coverage to noninterest-bearing transaction accounts. This applies to both the banks and credit unions. The extended coverage will end no later than December 31, 2020. Below is the summary of this provision as described in this section-by-section summary document provided by the Senate Banking committee:
Section 4008. Debt Guarantee Authority.
Authorizes the Federal Deposit Insurance Corporation (FDIC) to temporarily establish a debt guarantee program to guarantee debt of solvent insured depositories and depository institution holding companies. Noninterest-bearing transaction accounts may be treated as a debt guarantee program. The National Credit Union Administration (NCUA) is given authority to temporarily increase share insurance coverage for noninterest-bearing transaction accounts. Such authorities, programs, guarantees, and increases shall terminate no later than December 31, 2020.
The actual wording of Section 4008 that was passed by the Senate is available in this full text of the bill.
This provision appears to resurrect a provision of the Dodd-Frank Act that gave the FDIC and NCUA authority to provide temporary unlimited coverage for noninterest-bearing transaction accounts after the 2008 financial crisis. The FDIC issued a press release in 2010 that described the type of accounts that would receive unlimited coverage that would last through 2012:
Noninterest-bearing accounts, as defined in the Dodd-Frank Act, include only traditional, noninterest-bearing demand deposit (or checking) accounts that allow for an unlimited number of transfers and withdrawals at any time, whether held by a business, individual or other type of depositor.
There does not appear to be any provision in the CARES Act which increases the standard insurance amount of $250,000. Before the 2008 financial crisis, the standard insurance amount was only $100,000. This changed by legislation that Congress and the President passed during and after the 2008 financial crisis. At first the change was temporary. Later, the Dodd-Frank Act made it permanent.
Once the CARES Act is signed by the President, the FDIC and NCUA will likely issue press releases which will describe the implementation details.
This insurance coverage provision of the current bill has the same purpose as the provision that was included in the Dodd-Frank Act. It’s intended to calm depositors and bond holders. It might be most helpful in easing the concerns of businesses who often have millions of dollars in transaction accounts that are used to pay for expenses like payroll.
For most of us who keep our large deposits earning as much interest as possible, this provision won't directly help us any. Indirectly, it’s possible that it may be yet another factor that puts downward pressure on deposit rates. Businesses will be less likely to move their deposits out of small banks and into the large banks that are often considered “too big to fail.” Thus, the small banks will have more deposits and will have fewer reasons to attract deposits with competitive deposit rates. This unlimited coverage may also result in businesses and high-net-worth individuals moving their cash from money market funds into banks where they can get this unlimited insurance coverage.
On the positive side, this unlimited coverage may help small banks compete with the large banks which profit from their “too big to fail” image. There has been a long-term trend of small banks being acquired by large banks. Bank consolidation reduces competition. So if more small banks are able to remain open and independent due to this unlimited coverage, that will be helpful to savers in the long run.
Provisions Affecting Retirement Plans
There are other provisions in the CARES Act that affect retirement plans. I will have more details on these provisions in a future post.
After the CARES Act is signed by the President, I expect the FDIC, NCUA and IRS to issue press releases to describe implementation details. We should take the information they release as the official rules of how the CARES Act will change things. I plan to publish new posts when that information becomes available.
FDIC Continues to Reassure Depositors
The FDIC has been active in the last couple of weeks in reassuring the public about the safety of bank deposits. I reviewed this issue in this post last Friday. Yesterday, the FDIC issued another press release on this topic with the following remarks by the FDIC Chairman Jelena McWilliams:
"I want to underscore that our banks are safe," said Chairman McWilliams. "Your FDIC-insured deposits are safe. […] The FDIC was born out of a crisis, and it has witnessed many crises. We will get through this one together. Since 1933, no depositor has lost a penny of insured deposits in an FDIC bank, and that will not change."
Below is a list of a few useful resources on the topic of bank failures and the safety of deposits.
FDIC and NCUA References:
- Latest FDIC info on deposit insurance
- Latest NCUA info on credit union share insurance
- FDIC list of failed banks
- NCUA database of failed and conserved credit unions
- Evaluate the Financial Health of Your Bank or Credit Union
- Safety of Your Money - Importance of Deposit Insurance
- Safety of Your Money - Deposit Insurance Coverage Limits
- Safety of Your Money at Banks - Fraudulent Transfers
- Maximizing Your FDIC Coverage with Beneficiaries
- 10 Lessons from the 2008 bank failures
- My bank health and failure posts