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Facts about FDIC and NCUA

I keep seeing misinformation about FDIC in forums. Earlier this month I posted about the FDIC's article on the Top 10 FDIC Misconceptions. The top 2 FDIC misconceptions that I've encountered include: 1) You do not get the interest earned, only the principal when a bank fails, and 2) It may take years before they release all your funds.

If you keep below the insured limits, neither of these are true. Here's what that FDIC article states:

Federal law requires the FDIC to pay 100 percent of the insured deposits up to the federal limit - including principal and interest.


Federal law requires the FDIC to pay the insured deposits "as soon as possible" after an insured bank fails. Historically, the FDIC pays insured deposits within a few days after a bank closes, usually the next business day. In most cases, the FDIC will provide each depositor with a new account at another insured bank. Or, if arrangements cannot be made with another institution, the FDIC will issue a check to each depositor.

There are also a lot of misconceptions concerning the NCUA which is similar to the FDIC but for credit unions. The NCUA has made their insurance very similar to what FDIC offers. One common misconception about NCUA is that it doesn't have the same features regarding revocable trusts or POD accounts which allow you to go beyond the $100K coverage limit. Here's what the NCUA states:

Additional coverage is available on revocable trust or payable on death accounts. You can now name a parent or sibling as a beneficiary to get separate coverage. Previously, beneficiaries had to be a spouse, child or grandchild.

So for example, if you have an account at a credit union that's POD to one brother and another account that's POD to another brother, your total insurance can be increased to $200K.

FDIC Links

NCUA Links

  |     |   Comment #1
One thing I've always wondered is what if the interest put you over the 100k mark but your principle was under the limit would you still get all of the interest. ie is the cap the total amount of just the prinicple?
Banking Guy
  |     |   Comment #2
Assuming that you have only one non-IRA account ownership category (ie. $100K limit), I think any amount (including interest) over $100K would not be insured and could be subject to loss.
  |     |   Comment #3
What's written above re using a revocable trust, aka "POD", to gain more insurance is true. But be VERY cautious. Allow me to demonstrate with an example the problem you could encounter:

You open a three year CD in trust for your sister because you need the added $100K of deposit insurance protection derived thereby. But a year into the CD your sister passes away unexpectedly. Believe it or not, from the instant she dies you have NO INSURANCE! In particular you do not, as you might assume and expect, have coverage until the CD matures. When your beneficiary dies you have three choices: Name another qualified beneficiary immediately or . . . pay your penalty (if any) and withdraw your funds or . . . run the risk being without deposit insurance brings. I have this from an FDIC lawyer. I do not know with certainty it also works this way with the NCUA. Be careful.
Banking Guy
  |     |   Comment #4
Good point about the POD and if your beneficiary dies. It would be nice if a bank would allow a penalty-free withdrawal due to the death of the beneficiary (similar to what's allowed with a death of the owner).

It does seem to complicate matters when you go above the $100K limit even with PODs. Here's an example of when the bank Superior FSB went under. Here are FDIC records for this case.

Note the following:

At the time of closing, Superior had approximately $1.7 billion in over 91,000 deposit accounts. Of this total, approximately 94 percent of the accounts totaling $1.4 billion were initially determined to be fully insured and transferred to New Superior. The remaining six percent of the accounts, totaling $281 million, were considered potentially uninsured funds that required further FDIC review. The FDIC's toll-free call centers have handled over 60,000 customer inquiries through September 28. Currently, the FDIC has determined that an additional $200 million of the $281 million in deposits is insured and these funds have been released to depositors. Four percent of the $1.7 billion in total deposits have been determined to be uninsured - a total of $64 million. The FDIC is still gathering information from depositors to review insurance coverage for the remaining $17 million in deposits to determine if those deposits may be insured. The FDIC continues to work with depositors to resolve the remaining claims and make certain that insured depositors are protected.

The point of the above is that when you deposits are above $100K and you depend on PODs, it may take longer for the FDIC to reimburse you. I wonder if these potentially insured deposits that were investigated were POD accounts and the FDIC had to confirm that the beneficiaries were alive and were the proper relations.
  |     |   Comment #5
When a beneficiary on a POD account passes away, the account does not become some kind of special uninsured account. For insurance purposes, it is treated as an individual account and combined with all of the owner's other individual accounts for insurance purposes.

If that leaves the owner over $100k in individual accounts at the same bank, the owner has one other option: remove some money from one of the owner's other individual accounts. So, for example, if you have an individual money market account, you could take money out of it instead of breaking the CD account in order to get your individual accounts down under $100k.
  |     |   Comment #6

How Safe Is My FDIC-Insured Bank Account?
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Your bank account may not be as safe as you think (or hope). Taking a deeper look at the legal details and the financial depth of the FDIC reveals several troubling details that call into question how the FDIC would fare during a true banking crisis.

The US is coming out of a period of unusually low banking stress and failures. Since it is typical human behavior to let one’s guard down during tranquil periods, we might legitimately ask if this has happened with respect to the FDIC.

Before we address that, we need to understand bit more about the FDIC.

What is the FDIC?

Let's begin with a snippet from Wikipedia on the FDIC:

The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933. The vast number of bank failures in the Great Depression spurred the United States Congress into creating an institution which would guarantee deposits held by commercial banks, inspired by the Commonwealth of Massachusetts and its Depositors Insurance Fund (DIF). The FDIC provides deposit insurance which currently guarantees checking and savings deposits in member banks up to $100,000 per depositor.

Accounts at different banks are insured separately. One person could keep $100,000 in accounts at two separate banks and be insured for a total of $200,000. Also, accounts in different ownerships (such as beneficial ownership, trusts, and joint accounts) can be considered separately for the $100,000 insurance limit. The Federal Deposit Insurance Reform Act raised the amount of insurance for an Individual Retirement Account to $250,000.

The two most common methods employed by FDIC in cases of insolvency or illiquidity are the:

• Payoff Method, in which insured deposits are paid by the FDIC, which attempts to recover its payments by liquidating the receivership estate of the failed bank.

• Purchase and Assumption Method, in which all deposits (liabilities) are assumed by an open bank, which also purchases some or all of the failed bank's loans (assets).

In short, if your bank gets in trouble, the FDIC will ride in and either pay off your account (up to $100k), or sell your bank off to another bank which will then assume the usual duties of your bank. Under normal circumstances, a bank failure should not impact you in the least. But these are not normal times. We might reasonably ask how the FDIC would respond during a major banking crisis. After all, this is our money we’re talking about. Faith and hope are great at weddings and sporting events, but they should not form the basis of our strategy for handling our finances.

How many bank failures could the FDIC handle at once?

When we take a look at the financials of the FDIC (Figure 1) we see that the level of insurance (in circles below) is not terribly high either, when viewed as an aggregate amount (in blue) or on a percentage basis (in red).

Figure 1.

The 1.22% Reserve Ratio means that for every dollar in your bank account, the FDIC has 1.22 cents “in reserve” ready to cover your potential losses. This has proved to be an ample amount during the period of stability we’ve recently had, but it doesn’t seem particularly significant, considering the recent headlines about banking losses (Spring of 2008).

Consider, for a moment, the collapse of Bear Stearns. In order to assume that bank, JP Morgan asked for, and received, a special waiver from the Federal Reserve to keep $400 billion of suspect of Bear Stearn's assets off the books of JPM (page 4 of the linked document). While JPM may have been padding the books a little bit here, due to the uncertainty of how bad the wreckage might turn out to be, $400 billion dwarfs the $52 billion reserves of the FDIC.

If one medium-large bank collapse could wipe out the FDIC by a factor of nearly 8, what do you suppose would happen if there were multiple, simultaneous bank failures? At this point, my guess would be that Congress would be sorely tempted to borrow additional funds to remedy the situation, but I worry that hardship and losses might result while the laws were amended and sufficient funding avenues identified. So how many bank failures could the FDIC endure? The data suggests slightly fewer than one big one. I thought the FDIC has full faith and credit backing by the US treasury?

Actually, no, it does not. The language in Section 14 of the FDIC Act is clear and unambiguous (emphasis mine):

(a) BORROWING FROM TREASURY.-- The Corporation is authorized to borrow from the Treasury, and the Secretary of the Treasury is authorized and directed to loan to the Corporation on such terms as may be fixed by the Corporation and the Secretary, such funds as in the judgment of the Board of Directors of the Corporation are from time to time required for insurance purposes, not exceeding in the aggregate $30,000,000,000 outstanding at any one time, subject to the approval of the Secretary of the Treasury: Provided, That the rate of interest to be charged in connection with any loan made pursuant to this subsection shall not be less than an amount determined by the Secretary of the Treasury, taking into consideration current market yields on outstanding marketable obligations of the United States of comparable maturities.

Now that’s pretty interesting. First, that any additional money from the federal government is not a guarantee, but rather a loan, which will only be made subject to the approval of the Secretary of the Treasury. Further, that the loan is to be made at “current market yields." What do you suppose would happen to US Treasury yields during a true emergency? I can imagine a few scenarios where they might skyrocket, and this would serve to compound the difficulty of keeping the FDIC fund solvent.

How long does the FDIC have to repay me if things go bad?

Here things get murky. We turn to Section 11 of the act and find this (emphasis mine):

(f) PAYMENT OF INSURED DEPOSITS.-- (1) IN GENERAL.--In case of the liquidation of, or other closing or winding up of the affairs of, any insured depository institution, payment of the insured deposits in such institution shall be made by the Corporation as soon as possible, subject to the provisions of subsection (g), either by cash or by making available to each depositor a transferred deposit in a new insured depository institution in the same community or in another insured depository institution in an amount equal to the insured deposit of such depositor.

That only says “as soon as possible” and sets absolutely no time limit or maximum. Taken to the extreme, it might be impossible for the FDIC to ever make depositors whole again, and this is one of dozens of such “outs” that exist in the document. Remember, this act was written in 1933 when money was gold, times were uncertain, and government lawyers were exceedingly careful to avoid locking the government into any possible financial black holes.

And the FDIC Act is very clear to spell out that the only insurance funds available to depositors are those that exist within the fund itself:

(f)(1)(A) all payments made pursuant to this section on account of a closed Bank Insurance Fund member shall be made only from the Bank Insurance Fund

So, if the fund runs dry, there isn’t another possible source of funds that can be legally tapped without changing this wording. And that would take – wait for it – an act of Congress.

Surely Congress would appropriate the necessary funds to keep the FDIC solvent?

Here your guess is as good as mine. I would personally expect the US Congress to do everything in its power to the keep the FDIC well funded, especially during an emergency. I would not fault their desire here. But I can also think of a few scenarios or circumstances under which their ability could be taken away. For example:

1. If the banking crisis came at the same time as an interest rate spike and general funding emergency
2. If we were at war with Iran and things were not going well
3. If China suddenly started dumping their Treasury holdings in the opening gambit of an economic war

These would all be times under which I could easily imagine either a lethargic or inadequate response from Congress on the matter.

So how do I protect myself?

My advice here is consistent with all my other advice:
  |     |   Comment #15
Not on your life . Negative .
  |     |   Comment #7
In an ongoing state litigation does the FDIC have to formally substitute in as plaintiff if it is appointed receiver?
  |     |   Comment #8
The FDIC limit is per bank.  When Capital One completes (completed) its acquisition of ING Direct, that means if you spread funds into both banks to get competitive interest rates while staying under FDIC limites, your insured amount could be cut in 1/2 when all teh funds end up consolidated at one of the banks.  I may not have my merger facts right, but the point seems to be to watch out when your bank acquires another bank or is acquired- it might be two banks with competitive interest rates that you are both ways invested in.

I never heard of any FDIC grace period to let you get your funds sorted out to escape miss this trap, if I am right about the trap that is.  Does the FDIC have a strict or any rule requireing the banks to warn you?  I bet they don't! 

  |     |   Comment #9
JS, there is a 6 month grace period.  After 6 months, the banks will be treated as one for the purpose of FDIC insurance coverage.
marcus anthony bynum
  |     |   Comment #10
please note that we have to really know on how much cashflow is in cirrculation on oil offshore drilling daily.
  |     |   Comment #12
  |     |   Comment #16
Please , reconsider , insured ; ( travelers checks ) .
  |     |   Comment #17
That and REAL GOOD insurance

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