Bank & Credit Union Health Grades - Deposit Safety in COVID-19 Crisis

The economic impact of the COVID-19 pandemic has just begun. Loan delinquencies and defaults will surely increase due to the forced business shutdowns. The Fed, Congress and the White House have provided significant support which should help, but there still remains uncertainty about how the economy and the financial system will fare. As we learned from the 2008 financial crisis, when the financial system is under stress, bank failures rise dramatically.

Health Ratings Based on Latest FDIC and NCUA Call Reports

DepositAccounts.com Bank Health Ratings page

Banks that are most likely to weather this financial crisis will be the ones that are currently financially strong. That’s where the bank health ratings that we compile at DepositAccounts.com can be useful. The financial health ratings at DepositAccounts.com are now based on the FDIC and NCUA call reports from December 31, 2019. To review the health grade of your banks and credit unions, check out DA’s Bank Health Ratings page. Scroll down this page, and you can search for your bank or credit union. When you find your institution’s profile page, click on the “Health” tab. That will show you the overall health grade for the institution and the health grade components. In addition, you can review the financials of the institution. For more details, click on the FDIC Certificate number (for banks) or the NCUA Charter number (for credit unions) to see the FDIC/NCUA profile page for that institution.

The FDIC and NCUA typically release call reports for the institutions they insure about two months after the quarter ends. So the next call reports for March 31, 2020 will not be available until late May or early June.

Impacts from Future Loan Defaults

Of course, even the strong banks could have a difficult time if they have large exposure to businesses and individuals hit hardest by the coronavirus pandemic. Many banks have already started to increase their loan loss provisions in anticipation of defaults. For example, JPMorgan Chase announced in its Q1 earnings report that it had added $6.8 billion to loan loss provisions.

The FDIC, the NCUA, and the other federal regulators have issued temporary rules intended to give banks more leeway in modifying loans to customers affected by the pandemic. This should give banks and credit unions more time to manage the loan losses. This may result in more time before regulators decide that an institution’s loan loss has reached an unmanageable level. So it may take many months, if not years, before we see a significant number of bank failures caused by the pandemic.

Lessons from the Bank Failures After the 2008 Financial Crisis

One lesson from the 2008 Financial Crisis is that it can take years before a bank is forced to close from the effects of a financial crisis. As you can see below, bank failures started to ramp up in 2008, rising from 3 in 2007 to 25 in 2008. The ramp-up continued in 2009 with the number of failures rising to 140. The number continued to increase in 2010 when it finally peaked at 157. The number of bank failures then slowly went down until it was back to single digits in 2015. From 2015 to 2019, bank failures were rare, with the annual number never exceeding 8.

The summary below shows the number of bank closures per year from 2006 to 2019:

Another interesting development that started after the 2008 Financial Crisis is how the FDIC managed most bank failures. Starting in 2008, the FDIC has very often been able to arrange for other banks to assume all deposits of the failed banks. It’s rare for the FDIC to be unable to find a buyer. When the FDIC is unable to find a buyer, the FDIC typically sends checks of only the insured deposits to the depositors of the failed bank. It’s mostly in these cases when uninsured deposits may be lost. For the vast majority of cases when the FDIC finds a buyer, the acquiring bank assumes all of the deposits, even those that are uninsured. One exception is brokered deposits. It has been common in the FDIC assumption agreements for the acquiring bank to not assume brokered deposits. Thus, depositors holding brokered CDs that exceeded FDIC coverage limits may have lost their uninsured deposits.

After the 2008 Financial Crisis, I kept track of the bank failures and the number of ones in which the FDIC wasn’t able to find buyers.

Out of the 140 bank failures in 2009, only 10 failed banks were not acquired by other banks. These were typically small banks. Out of these 10 banks, only 4 had at least one billion in deposits.

Out of the 157 bank failures in 2010, only 8 failed banks were not acquired by other banks. Most of these were also small banks. Only one of these 8 failed banks had at least one billion in deposits.

Even though the vast majority of bank failures don’t result in loss of uninsured deposits, it’s wise not to assume this will always be the case. When banks are closed due criminal actions by upper management, the FDIC often can’t find a buyer that’s willing to assume all deposits. Two examples of this occurred in December 2017 and June 2019. In both cases, management fraud resulted in the bank closures, and in both cases, the acquiring bank did not agree to assume uninsured deposits. Only insured deposits were assumed by the acquiring banks.

FDIC and NCUA Coverage for Amounts Above $250,000

For both of the bank failures described above in which the acquiring banks did not assume uninsured deposits, the FDIC provided the following instructions for depositors of the failed banks:

If you had more than $250,000 in your account(s), or if the total of your related accounts exceeds $250,000, your accounts may require review by an FDIC Claims Agent. Please contact the FDIC Call Center at 1-877-367-2718 to schedule an appointment with an FDIC Claims Agent.

When your deposits at a bank total less than the standard maximum deposit insurance amount ($250,000), it’s easy for the FDIC to pay you all of your insured deposits. According to this FDIC resource page, this includes the “principal and any accrued interest through the date of the insured bank's closing.” However, when your deposits exceed $250,000, it may require a review by the FDIC if the bank fails and a buyer can’t be found to assume uninsured deposits. If you ever find yourself at a review with an FDIC Claims Agent, you’ll be very glad if you had regularly reviewed your deposits to ensure all principal and accrued interest were under the FDIC limits. It's important to remember that this is your responsibility and not the bank's.

Long-time readers of DA know that there are many ways to maintain deposit insurance in excess of $250,000 at one bank or credit union. In this FDIC resource page, it is stated that:

Deposits maintained in different categories of legal ownership at the same bank can be separately insured. Therefore, it is possible to have deposits of more than $250,000 at one insured bank and still be fully insured.

To learn the details of the different ownership categories, I found this FDIC brochure - Your Insured Deposits (dated 1/2020) to be useful.

Three simple ownership categories include Single Accounts, Joint Accounts and Retirement Accounts. By having Single Accounts, Joint Accounts and Retirement Accounts at one bank, it’s possible for a couple to have up to $1.5 million of deposits that are fully insured at one bank. I verified this using the FDIC EDIE tool. I’ve included a snapshot of the tool’s output which shows $1.5 million being fully insured.

How a Couple Can Cover $1.5 Million with No Beneficiaries

Another ownership category can make it easy for one person to also have $1.5 million of deposits fully insured at one bank. That’s the Revocable Trust Accounts category. The informal revocable trust can easily be set up at most banks when you open an account. Here’s how the FDIC defines an informal revocable trust on page 10 of the FDIC brochure:

Informal revocable trusts–often called payable on death, Totten trust, in trust for, or as trustee for accounts–are created when the account owner signs an agreement, usually part of the bank’s signature card, directing the bank to transfer the funds in the account to one or more named beneficiaries upon the owner’s death.

This FDIC brochure also describes this important rule for revocable trust insurance coverage:

When a revocable trust owner names five or fewer beneficiaries, the owner’s trust deposits are insured up to $250,000 for each unique beneficiary.

This rule makes it easy for one person to have up to $1.5 million of deposits fully insured at one bank. This can be done by having a single account with $250,000 and one or more informal revocable trust accounts that total $1.25 million. The nice thing about this “5 or fewer” beneficiary rule is that you can designate one beneficiary (such as your spouse) to receive the vast majority of your deposits if you die. The four other beneficiaries can be designated to receive only a small part of the total. I’ve included a snapshot of the output of the EDIE tool which shows this:

How One Person Can Cover $1.5 Million with Beneficiaries

Risks of Depending on Beneficiaries to Extend Insurance Coverage

There is a downside to using beneficiaries to extend FDIC coverage. It is possible that a beneficiary will not qualify and that will reduce your FDIC coverage. The following excerpt is from the FDIC brochure:

In general, the owner of a revocable trust account is insured up to $250,000 for each unique beneficiary, if all of the following requirements are met:

1. The account title at the bank must indicate that the account is held pursuant to a trust relationship. This rule can be met by using the terms payable on death (or POD), in trust for (or ITF), as trustee for (or ATF), living trust, family trust, or any similar language, including simply having the word “trust” in the account title. The account title includes information contained in the bank’s electronic deposit account records.

2. The beneficiaries must be named in either the deposit account records of the bank (for informal revocable trusts) or identified in the formal revocable trust document. For a formal trust agreement, it is acceptable for the trust to use language such as “my issue” or other commonly used legal terms to describe the designated beneficiaries, provided the specific names and number of eligible beneficiaries can be determined.

3. To qualify as an eligible beneficiary, the beneficiary must be a living person, a charity or a non-profit organization. If a charity or non-profit organization is named as beneficiary, it must qualify as such under Internal Revenue Service (IRS) regulations.

The last requirement is straightforward. Make sure all of your designated beneficiaries are living. If one dies, make sure to immediately replace the beneficiary. The FDIC provides no grace period for coverage purposes when a beneficiary dies.

The first two requirements are not straightforward, and they have caused a lot of worries since there is no standard at banks on how they document beneficiaries. Each bank has its own way of how it documents the evidence of beneficiaries to the account owners. It causes many customers to worry that the bank’s beneficiary records may not meet these two requirements.

I don’t have any advice that can provide 100% assurance for this concern. I suggest that at the very least you ask for and receive the evidence of the beneficiary information from the bank. Ideally, the evidence will be a copy of an official document such as a signature card that shows the trust relationship in the account title. In addition, it should name the beneficiaries. I did find this FDIC document that provides details of FDIC insurance coverage for revocable trust accounts. However, I’m afraid it still probably won’t help you obtain 100% assurance that you won’t have issues if you ever face the FDIC Claims Agent.

Deposits at Credit Unions

For deposit coverage at credit unions, the NCUA’s rules are very similar to the FDIC’s. This NCUA brochure - Your Insured Funds (dated April 2019) has similar details to the FDIC brochure. On page 35, it lists the three coverage requirements for revocable trust accounts. The NCUA also has an insurance estimator tool that’s very similar to the FDIC EDIE tool.

FDIC and NCUA References:

• When a Bank Fails - Facts for Depositors, Creditors, and Borrowers
• Latest FDIC info on deposit insurance
  • FDIC brochure - Your Insured Deposits (dated 1/2020)
  • FDIC EDIE Online Calculator (Deposit Insurance Estimator)
• Financial Institution Employee’s Guide to Deposit Insurance (2016 Edition)
  • Revocable Trust Accounts (12 C.F.R. § 330.10)
• FDIC list of failed banks
• Latest NCUA info on credit union share insurance
  • NCUA brochure - Your Insured Funds (dated April 2019)
  • NCUA insurance estimator tool
• NCUA database of failed and conserved credit unions

DepositAccounts References:

• Evaluate the Financial Health of Your Bank or Credit Union
• Safety of Your Deposits in the COVID-19 Pandemic
• Banking at Fintechs and the Safety of Your Money
• 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