FDIC: Passage Of The Dodd-Frank Attracts More Depositors

FDIC Seal

Consumers on how the FDIC ensures the safety of their deposits within the legal limit and what pre-emptive measures it undertakes to keep consumer funds safe and secure. If you have opened an account with a bank, then you are familiar with the FDIC. The Federal Deposit Insurance Corporation or FDIC is an agency created to maintain the confidence of the public in the banking and financial systems as well as to keep these systems stable by protecting the deposit insurance of consumers. The FDIC is the regulating agency of over 4,900 banks in the United States, with around $7 trillion worth of deposits from consumers. It grants the first $250,000 worth of insurance for savings as well as checking deposits to a depositor’s account in case the depositor’s insured bank fails. Here is our article on What you need to know about FDIC Insurance

FDIC Seal
FDIC Seal

 FDIC: Passage Of The Dodd-Frank Attracts More Depositors

Most of the banks insured by FDIC and FDIC member banks post their emblems of FDIC membership in their branches. The FDIC is funded exclusively by their member banks; these banks are required to comply with very specific reserve and liquidity requirements before they become members. To ensure that the banks abide by established guidelines, examiners visit them on a regular basis. A bank that fails to fulfill said guidelines is issued a warning; if the bank’s failure to comply persists, the FDIC is authorized to compel the bank to administer corrective action or to make changes in the bank’s corporate management.

Features of the FDIC

FDIC insurance enables the depositor to get back his or her money back from a bank that has failed, closed or run out of money; the FDIC will pay the depositor the funds which are due to him or her with a certain limit, typically $250,000 per depositor. This FDIC policy assures depositors that the U.S. government stands by its mission to promote trustworthiness and fulfills its promise to protect consumers’ money.

An FDIC coverage applies to all kinds of deposits including:

  • Savings accounts.
  • Checking accounts.
  • Individual retirement accounts (IRAs).
  • Money market accounts.
  • Certificates of deposit (CDs).
  • Cashier’s checks.
  • Trust accounts.

The coverage, however, does not apply to the following because these are not considered to be deposits even if these were bought from an FDIC insured bank:

  • Money market funds.
  • Contents of safety deposit boxes.
  • Annuities.
  • Mutual funds.
  • Stocks.
  • Bonds.
  • U.S. treasuries.
  • Life insurance policies.

FDIC insurance does not cover credit unions (they are covered by the National Credit Union Share Insurance Fund or NCUSIF) nor does it protect the depositor from identity theft or the unauthorized use of his or her bank account.

How the FDIC Works

Insurance policies are sold by the FDIC to banks to cover savings and checking accounts against any possibility of failure of said banks. When you open a savings or checking account with a particular bank, for instance, it purchases an FDIC insurance policy on your account from the FDIC. Incidentally, not all banks purchase FDIC insurance because banks are not mandated by law to be insured by the FDIC. In the event of a bank’s failure, the FDIC may also consider to arrange the sale of a bank that has failed to a financially healthy bank. The financially healthy bank, the “assuming bank,” assumes the responsibility of paying the failed bank’s insured deposits. This is known as the “Purchase and Assumption Transaction.”

How the FDIC Pays Back Insured Deposits

1. The Purchase and Assumption Transaction

The failed bank’s insured depositors can immediately access their insured deposits; with the sale of the failed bank, the insured depositors automatically become depositors of said assuming bank. The assuming bank can purchase loans and the failed bank’s other assets.

2. The Deposit Payoff

Should there be no open bank acquisition for the deposits of the failed bank, the FDIC pays the depositors directly by checks for their insured balance in each account. These payments are usually made within several days after the failed bank’s closing. Some deposits may take a little time to be paid off because these are deposits which require supplemental documents from depositors:

  • Accounts related to formal written trust agreements.
  • Funds deposited by fiduciaries (people who serve in an agent capacity on behalf of clients when purchasing or opening deposits like CDs at a bank insured by the FDIC).
  • Deposits put in by administrators of benefit plans of employees.

How FDIC Insurance Coverage is Determined

FDIC insurance limit is applicable to the individual account holder at an FDIC insured bank. These are the FDIC’s definition of coverage for various account holders by ownership type:

  • Single account deposits: usually checking and/or savings accounts owned by an individual has an FDIC limit of $250,000 per individual owner for all single accounts deposited at each FDIC insured bank.
  • Joint account deposits: owned by two or more individuals, the FDIC coverage limit is also up to $250,000 per individual owner for all joint accounts deposited at each FDIC insured bank.
  • Certified retirement accounts: the coverage for IRAs and contribution plans which are defined as self-directed is the FDIC insurance limit of $250,000 for all retirement accounts deposited at each bank.

Trust Accounts

Revocable trust accounts fall into a different category altogether. With this type of ownership, the beneficiaries to the said trust account are insured but not the owners of the said trust account. Funds have a limit of $250,000 for each of the beneficiary designated per owner of an account. To illustrate: a couple who has $800,000 in a living trust account that has been qualified with two children equally-designated beneficiaries would have the entire account’s balance fully insured. Each child/beneficiary is covered up to the amount of $500,000, with $250,000 from the mother and another $250,000 from the father. With the $800,000 balance, this account doesn’t exceed the limit of the combined $1,000,000. The two types of trust accounts are the POD or Payable-on-Death that allows the depositor to name his or her beneficiaries on the account’s signature card and the living trusts that are created as a part of an estate plan’s legal and formal arrangement.

Self-Directed Retirement Accounts

A self-directed retirement account, or IRA as mentioned earlier, includes the self-directed defined contribution plan account, individual retirement account, Section 457 plan account, Roth IRA, and self-directed Keogh account which are owned by a single individual. TheFDIC 2014 insurance limit remains at $250,000 for the total balance in a combination of all these accounts or the total balance in one account at the same bank. However, this limit is applicable only to that portion of the retirement account’s balance which are money market accounts, CDs or other similar bank deposits; the rest of the retirement account’s in bonds, mutual funds, annuities, stocks, and other investments are uninsured even if these were purchased at a bank insured by the FDIC.

Permanent Coverage Limit

The FDIC insurance limitwas increased from $100,000 to the existing level in October of 2008. It was supposed to have reverted back on December 31, 2013 but the successful passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as “Dodd-Frank” after its authors, U.S. Senator Christopher J. Dodd (D-Connecticut) and U.S. Representative Barney Frank (D-4th District, Massachusetts), has made the $250,000 limit permanent. Whether you are one of those individuals who has large sums of money deposited in banks or you just need to have a large sum “parked” in a bank account for a relatively short period of time, this permanent FDIC 2014 limit will prove advantageous to you; assuming that you have set up your account properly, you need not regroup in order to cope with lower limits anytime in the near future.

Setting Up and Monitoring Your Account

The FDIC offers a potential depositor four ways to obtain information on setting up an account and monitoring it to maximize that account’s protection including:

  • Online customer assistance: a form that can be filled out online by depositors for queries or submission of complaints and sent through email.
  • Electric Deposit Insurance Estimator: “EDIE” is an online service that is fully automated and interactive to help new depositors to see how their accounts are set up.
  • Toll-free hot line: future depositors can call (877) 275-3342 a.k.a. (877) ASK-FDIC and talk to live personnel to obtain FDIC information free of charge.
  • Snail mail: depositors can also submit their complaints or queries by snail mail to the FDIC, Deposit Insurance Outreach, 550 17th Street NW, Washington, D.C. 20429-9990.

To be certain that you have no funds that are left uninsured, monitor the respective balances of your bank accounts. Once you have exceeded a bank’s FDIC 2014 insurance coverage limit for one ownership account category, put the excess amount into another account with another bank. It pays to have your funds insured, of course, but don’t let the total amount of your deposit be more than what it has been insured for. Otherwise, in the event that something bad happens to the bank, you will not be able to get all your money back.

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