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 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.