Coronavirus Stimulus Package Includes Limited FDIC Coverage Expansion
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
DepositAccounts References:
- 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
That isn't my concern. my concern is that the money they give me will be worth less than the money I deposited because the more dollars they print the less each dollar is worth. So I might have the same amount of dollars, but they can only buy half as much. That effectively means I've lost half my money.
The fact that the insurers never mention that is not reassuring to me at all. As I said previously, I'd rather they not say anything than reassure me about a nonexistent risk and fail to mention the real risk.
I made well over the income limit in 2018 to get a stimulus check. But I made under the income limit in 2019 since I retired. If I file my 2019 taxes tomorrow, will that be early enough for the IRS to base its decision to send me a check on my 2019 figures? Or am I too late to the party?
But people who ultimately qualify for less money than they got this year—a person whose income rises from $70,000 to $100,000—wouldn’t have to pay it back."
So, no claw back. As to filing now for 2019, instead of waiting till July, still have no idea what the cutoff date would be regarding these first stimulus checks. However, if there is a second wave of stimulus checks before July then may be a good idea to get it in earlier.
Lesson learned from 2008: Keep deposits within FDIC and NCUA limits. Banks and credit unions have failed, and they might so again. As I mentioned to the Wife, "return of principal" is ever so important in troubling times than "return on principal".
Stay safe.
Regards,
Bozo
My impulse 2 weeks ago was to rush filing up my MACU 3.5% add-on when I have the available funds April 1st, but now I'm not so sure about it.
Not that I can predict, but does circumspection in that regard have any merit? I suppose take a bird in the hand now, and an EWP later (assuming it's allowed) if one has to.
If a person is willing to lose money to own T-bills, they should be more than willing to put that money into their bank checking account that has both instant liquidity and no cost. That statement assumes equivalence of the full faith and credit of the US Government, which is clear for the T-bills and appears to be the case for this class of deposits.
This policy may have the, presumably intended, effect of providing a huge amount of liquidity to the banking system. After all, if a bank can attract deposits at zero interest, they don't have to go to the discount rate window and pay that rate. The customer gets to avoid negative rates and avoid credit risk and retain liquidity.
Ken, would it be possible for you to verify the strength of the guarantee vis-a-vis T-bills and if their are dollar limits on accounts to which this policy applies?
Thanks for a(nother) informative article.
I just hope I'm able ro still breathe tomorrow!
What else could they be?
(b) Required intention and naming of beneficiaries. The required intention in paragraph (a) of this section that upon the owner's death the funds shall belong to one or more beneficiaries must be manifested in the title of the account or elsewhere in the account records of the credit union using commonly accepted terms such as, but not limited to, in trust for, as trustee for, payable-on-death to, or any acronym therefore, or by listing one or more beneficiaries in the account records of the credit union. In addition, for informal revocable trust accounts, the beneficiaries must be specifically named in the account records of the insured credit union. The settlor of a revocable trust shall be presumed to own the funds deposited into the account.
(italics in original; not added for emphasis)
You may want to read the NCUA publication "Your Insured Funds", especially the section on "Revocable Trust Accounts" (starting at page 33 of the print edition)
https://www.mycreditunion.gov/sites/default/static-files/insured-funds-brochure.pdf
an insurable interest in those accounts of 250K for each beneficiary. Thank you for that, Alan.
contributions
The provision encourages Americans to contribute to churches and charitable
organizations in 2020 by permitting them to deduct up to $300 of cash contributions,
whether they itemize their deductions or not.
Section 2205. Modification of limitations on charitable contributions during 2020
The provision increases the limitations on deductions for charitable contributions by
individuals who itemize, as well as corporations. For individuals, the 50-percent of
adjusted gross income limitation is suspended for 2020. For corporations, the 10-percent
limitation is increased to 25 percent of taxable income. This provision also increases the
limitation on deductions for contributions of food inventory from 15 percent to 25
percent.