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Safety of Your Money - Importance of Deposit Insurance

It has been a while since I started to review the issue of safety of our money in banks and credit unions. With the news of cyber hackers and Greek bank closures, it’s understandable to have some concerns about our money. There are many things to consider when we talk about the safety of our money. I touched on several things in my overview of the safety of our money in banks. In this article my focus will be on one important protection for our money, deposit insurance.

The two main deposit insurers in the United States are the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA). The FDIC covers banks, and the NCUA covers credit unions. Both are independent federal agencies that operate with the backing of the full faith and credit of the U.S. Government. That backing may seem insufficient if you think what’s happening in Greece could happen here. For this article, I’m not going to review the economic possibilities that could cause us to have a banking crisis that Greece is now experiencing. I’ll just say that the U.S. banking system held up well through the 2008 financial crisis. No one lost any of their FDIC-insured or NCUA-insured deposits. In addition, for the large majority of bank and credit union closures that occurred since the financial crisis, depositors had full access to their money after the closures. In these cases, the FDIC or NCUA arranged for another bank or credit union to assume all deposits. In rare cases, no other bank or credit union assumed deposits. When this occurred, the FDIC or NCUA mailed checks of insured deposits (Avoiding this is one reason to check on the financial health of your bank or credit union.)

Another deposit insurer is the company American Share Insurance (ASI). This is a private company, and unlike the NCUA, it’s not backed by the U.S. Government. A few credit unions in certain states only have deposit insurance from ASI. The safety of ASI has long been debated. The ASI may not be as safe as the NCUA, but it does have a long history. Also, if a credit union is insured by the ASI, you can be assured that the credit union is regulated by a state agency.

One thing in common among the FDIC, NCUA and ASI is that they ensure a level of standards. You can be assured that the institution is regulated by state and/or U.S. federal agencies. That regulation greatly reduces the risk that the institution is a scam.

Cases Without Deposit Insurance

One type of bank that may lack FDIC insurance is a foreign bank. You may sometimes see foreign banks with high deposit rates advertise to Americans. These can be dangerous. Several years ago the Caribbean-based Millennium Bank advertised high CD rates. In 2009 the Securities and Exchange Commission (SEC) shut down this supposed bank. The SEC found it was just a $68 million Ponzi scheme involving the sale of fictitious CDs. A more well-known CD ponzi scheme was Stanford International Bank.

Most foreign banks that advertise to Americans are not ponzi schemes. However, determining the safety and soundness of foreign banks can be very difficult. As we learned from the above ponzi schemes, things can go well for investors for many years before major problems arise. Foreign banks may have some regulatory oversight by foreign governments, but it's difficult to know the extent of the oversight. That's an important reason to stay with US banks and credit unions which are regulated by state and/or U.S. federal agencies.

Another way you may come across a business that looks like a bank is in newspapers. Financial companies that sell annuity and investment products often advertise above-market rates on CDs as a ploy to get a consumer in the door. As this FDIC consumer news article warns, "they then try to sell investment products that are not FDIC-insured and not in the consumer’s best interest." These financial companies market CDs as FDIC insured. They are usually acting as CD brokers who will place your money with an FDIC-insured bank. The CD rate they advertise in the paper is much higher than the actual rate that the FDIC-insured bank is offering. The higher rate is based on a bonus the brokers pay. It’s like what timeshares offer to people to come in and listen to a sales pitch. The advertised CD will probably have a short term and a small maximum deposit. That allows them to advertise a "high" rate. If you don’t mind the sales pitch, these CDs may not be a bad deal. However, as the FDIC warns, the "CDs they sell may involve more risks than working directly with an insured bank."

Verifying a Bank or Credit Union Is Insured

If you want to minimize risk, it makes sense to only bank with institutions that have either FDIC, NCUA or ASI deposit insurance. A legitimate bank or credit union will have on its website the FDIC, NCUA or ASI logo. It’s possible that a fraudulent website could also have these logos. Thus, it’s a good idea to verify that a website does belong to a legitimate bank or credit union.

If you want to minimize risk, it makes sense to only bank with institutions that have either FDIC, NCUA or ASI deposit insurance.

If a website claims to be an FDIC-insured bank, search for the bank using the FDIC BankFind tool.

If a website claims to be a NCUA-insured credit union, search for the credit union using the NCUA Research a Credit Union tool.

If a website claims to be an ASI-insured credit union, search for the credit union using the search feature at this ASI webpage.

In all of the above cases, you’ll be taken to a summary page for the institution that will have a website URL. That is the official website for that bank or credit union. Unfortunately, things aren’t always straightforward. Banks and credit unions can have additional websites that they use to market deposit products. These may be the internet division for the bank. For these cases, it’s best to obtain the bank phone number from the official website and call the bank to confirm that the other website is in fact owned by the bank.

By confirming a bank has legitimate deposit insurance, you won’t have to worry about seeing your institution in the news after it’s been shut down by the government. I’m sure customers of Stanford Bank realized the importance of the FDIC when they learned their money had been lost in a ponzi scheme. Of course, there are times when legitimate banks and credit unions fail. In these cases, the FDIC, NCUA and ASI will make sure you don’t lose any of your insured deposits.

Other Safety Issues

Verifying deposit insurance of our institutions isn’t the only thing we need to do to keep our money safe. You must also ensure your deposits are under the coverage limits. Even if your money is fully insured, there are still risks. Employee theft and electronic fraud can put your money at risk. I’ll focus on these issues in future articles.

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  |     |   Comment #1
yup, this is what came to mind the other day when I was tempted to open another CD at navy due to that .50% added to their existing rates (which ends tomorrow) But I stopped short cause I'd be way over the ins limit, even though I feel navy is a safe CU, I just remembered the time I had when Wachovia was shaking, and Wells came in to buy them, I had over the ins there at that time, and it took a bit to get it out, although it ended up not having that much effect, since Wells took over and left all CD's as is with their exixting rates, but it was a wake up at the time, and didn't feel like dealing with that again, besides i don't know the people as well that run the local navy as I did the guy that ram the local Wachovia.

So I make sure now i stay within the limits, even though at times you have to wonder just how long it would take to get your funds back if things went real south real fast. with the debt as high as it is. I mean yeah your covered, and yeah we'll give you back your money, you just have to wait for a few years, and till we get the debt down, okyyyyy.... lol
  |     |   Comment #2
And 2008 brought to light the importance of having readily available cash...those were anxious times! 
  |     |   Comment #3
Good article. Ken, please be sure to explain some of the contortions that ASI, a relatively small private company that is not Federally insured, has gone through in recent years in order to rescue troubled credit unions.
Ken Eaton
  |     |   Comment #4
Although it's a lot better than nothing, when I see the FDIC logo and read....'Backed by the full faith and credit of the U.S. Government.', I can't help but think back to when the Government decided to stop selling Series H/HH US Savings Bonds. Series H/HH bonds could only be obtained by exchanging a final matured Series E or EE bond. It may have taken 30 to 40 years to reach that point. So you may start out with a plan to buy Bonds through payroll deduction for a number of years. Then when final maturity comes, exchange them for HH Bonds and live off of the interest. Deferring income tax until money is withdrawn.  In 2004 the Government stopped issuing the HH Bonds. Not just for people buying new EE Bonds from that date on. But for everyone including people that may have had only 2 years to go.

   If they can do that. What can they do to FDIC coverage or to IRAs? So I don't have full faith in the full faith and credit of the Government.
  |     |   Comment #6
Your right. The government can change the rules and there's nothing you can do about it.
  |     |   Comment #5
A possible default is what worries me the most about the federal reserve and their policies.
  |     |   Comment #7
So if you are worried about the FDIC or NCUA defaulting or no covering their promises, where is a safer place to be with your investments?  

Also based on comment #1, suppose you had over the $250K NCUA insured limit on ira accounts at a credit union.   Say for example, you had $225K in a Roth IRA and $225K in a traditional IRA. That would be $200K over the insured limit.  Which of the two IRA accounts would the $200K uninsured amount be taken from.  Would they take it in equal parts from the tax free Roth IRA or the tax deferred traditional IRA?
  |     |   Comment #8
I don't know but I would never go over the insured limits, there are ways to insure over the limits depending how the CD ownership is worded. Btw I said that is what worries me about fed policies of which I have no control..... I guess gold and silver but hopefully  my fears won't be realized.
  |     |   Comment #9
Until they prohibit the holding of gold/silver...remember the dollar use to be convertible into gold...that backing was removed by Nixon in '73
  |     |   Comment #12
I have a little gold and silver also some stocks.... I and ee bonds but most is in CDs.
  |     |   Comment #10
You do understand that if you have various bank CDs in a traditional IRA with a brokerage that you are insured for $250K per bank not just for the brokerage IRA.  This way one can have over $250K in the brokerage IRA but just make sure you don't go over the insured amount for "each" bank in the particular IRA.  If you have another IRA in a  different brokerage account and purchase CDs for it too, you have to keep track that you don't buy the same bank's CDs and go over the insured amount allowed for that particular bank.  It can be a bit confusing until one gets used to it because the two brokerages we use seem to sell the same bank's CDs with basically the same terms and rates.
  |     |   Comment #11
I already knew this, but what if you were over the $250K limit with both a Roth and traditional IRA with one specific bank and the bank defaulted.  Say you had $50K in the Roth IRA and $300K in a traditional IRA.  $100K over the insured limit.  Could you possibly lose your tax advantaged $50K Roth IRA due to both accounts being over the $250K coverage limit?
  |     |   Comment #13
I don't know the answer to that but just call the fdic if it is a bank or the ncua if it is a credit union and they will give you the correct answer.
  |     |   Comment #14
In most cases the FDIC merges the failing bank with another and all accounts and amounts over the insurance are covered.  In some cases they do cash out and pay only the limit until they dispose off the assets and return what us left. .  What I worry about is a system failure that is above what the FDIC can control.  Greece and Puerto Rico are what scare me.  Cyprus is another example. Many mutual companies and pensions have invested in PR municipals.  Chicago is another cith on the brink too.

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