The collapse of Silicon Valley Bank in March 2023, the biggest bank failure since the financial crisis and the second-largest in U.S. history, has brought the role of the Federal Deposit Insurance Corporation or FDIC in protecting customers’ money into sharp focus. If you’ve been reading about bank collapses and wondering how safe your money is and what actions you may need to protect it, you’ve come to the right place.
In this article, we’ll talk about FDIC, the role the FDIC plays in protecting your money, what’s covered by FDIC insurance and the limits, and of course, what happens when banking institutions fail and the FDIC is forced to step in.
What is the FDIC?
The Federal Deposit Insurance Corporation, or “FDIC” for short, is an independent federal agency established through the Banking Act of 1933, signed into law by President Franklin D. Roosevelt. The FDIC emerged during the Great Depression, and its primary role was to insure deposits at U.S. Member banks. If a member bank were to fail, as happened in March 2023 with the collapse of Silicon Valley Bank and Signature Bank within days of one another, the FDIC makes sure that all depositors do not lose money and continue to have access to their funds. According to an FDIC spokesperson, “In the 90-year history of the FDIC, no one has lost a penny of their insured deposits.”
In addition to insuring bank deposits, the independent agency supervises banks and savings associations to ensure they comply with consumer protection laws, including the Fair Credit Billing Act, the Truth in Lending Act, and the Fair Debt Collection Practices Act.
What is FDIC insurance?
FDIC insurance works in the same way as all other types of insurance. If your bank has FDIC insurance and shuts down, the insurance will cover the money you had in the bank account up to a certain dollar amount.
What FDIC insurance does is allow account holders to have peace of mind that their money and their savings are protected in the event a bank can’t meet its obligations or shuts down. The FDIC insures up to $250,000 per depositor, per FDIC-insured bank, per ownership category.
While banks must apply for FDIC insurance and pay an insurance premium for this coverage, a bank’s account owners pay nothing for deposit protection. There’s also nothing you need to do to take advantage of the FDIC insurance coverage. As long as your bank is an FDIC member bank, you’re automatically covered. If your bank were to fail, your deposits would be covered on a dollar-for-dollar basis, including both the principal and the interest accrued through the date of default.
What’s covered by FDIC insurance?
Consumer deposits at member banks are protected by the FDIC, while deposits at credit unions are insured through the National Credit Union Share Insurance Fund (NCUSIF), administered by the National Credit Union Administration (NCUA).
The types of accounts and deposit products that the FDIC covers include:
- Checking accounts
- Savings accounts
- Money market deposit accounts
- Certificate of deposit (CD) accounts
- Cashier’s checks and money orders
- Brokered CD accounts
- Negotiable order of withdrawal accounts
- Prepaid accounts, assuming specific requirements are met
- Self-directed retirement accounts, including IRAs
- Revocable and irrevocable trust accounts
- Bank-held employee benefit plans (not self-directed)
- Corporation, partnership, and unincorporated association accounts
- Accounts owned by government entities
Financial products that the FDIC does not insure include:
- Annuities
- Stocks, bonds, or mutual funds
- Municipal securities
- U.S. Treasury bills, bonds, or notes (these are backed by the full faith and credit of the U.S. Government)
- Life insurance policies
- Contents of a safe deposit box
- Losses incurred from investments
- Crypto assets
If you’re unsure whether your deposits are FDIC-insured, you can call your bank or use the FDIC’s Electronic Deposit Insurance Estimator (EDIE) for information about your accounts.
FDIC insurance coverage limits
The FDIC insurance covers up to $250,000 per depositor, per institution, per ownership category. Let’s talk about what that means.
Per depositor
A depositor is a person who deposits money in a bank or financial institution. According to the FDIC insurance limits, the FDIC will insure deposits made by that one person in one insured bank, the institution. Therefore, if two people were to have a joint account, even though they have a single account, they would be considered independent depositors, and each will be insured for up to $250,000.
Per institution
A person may have accounts in many different banks, and each deposit would be insured separately. The deposits made in one insured bank would be independent of any deposits the same person may have in any other insured bank. Therefore, if someone had deposits in two different banks, they would be insured independently for each of those accounts for up to $250,000 individually.
Per ownership category
The ownership category refers to who owns an account in a bank or financial institution. There are several different types of accounts, such as individual, joint, retirement, and trust, and each of those account ownership categories includes separate coverage.
- Single accounts: $250,000 per owner
- Joint accounts: $250,000 per co-owner
- Retirement accounts, including IRAs: $250,000 per owner
- Revocable trust accounts: $250,000 per depositor per unique beneficiary
- Irrevocable trust accounts: $250,000 per unique beneficiary entitled to the account
- Corporation, partnership, and unincorporated association accounts: $250,000 per corporation, partnership, or unincorporated association.
- Employee benefit plan accounts: $250,000 per plan participant entitled to the account.
- Government accounts: $250,000 per official custodian.
How to find out if your bank is FDIC insured
To find out whether you’re banking with an FDIC-insured institution, you’ll want to look for the FDIC insurance logo on the bank’s website. It says “Member FDIC,” and it’s easy to spot if your financial institution is an FDIC-insured member. Alternatively, head over to the FDIC’s BankFind tool, where you can quickly search your bank’s name, FDIC certificate number, or website address to see its current status.
What happens if your bank fails
As long as your bank is FDIC insured, the unlikely event of the collapse or failure of a bank will not affect your finances as long as they’re below the specified limits. That said, bank failures are fairly uncommon, except in periods of recession. In the U.S., there have been 562 failed banks since 2001, the majority of which occurred from 2007-2009. Still, as recent events have shown, large banks can fail without warning, which can cause significant losses if your deposits aren’t insured.
When a bank fails, it can no longer pay back debts or return deposits to customers; a bank regulator will step in and close the institution. That’s when the FDIC will kick into gear to protect customer funds. It will take over control of the assets and liabilities of the bank and either pay out account balances or provide customers with access to their funds up to the insurance amount limit. This all happens within a few days of the financial institution being closed.
How to maximize FDIC insurance coverage
If you’ve been consistently saving and making headway toward your personal goals, ensuring your money is protected is essential. Here’s how to maximize your FDIC deposit insurance coverage:
- Open accounts at different banks: Since the FDIC will cover up to $250,000 per depositor, per institution, if you open another account with a different institution, both your accounts will be covered individually up to $250,000. It’s important to note that this refers to the entire institution, so opening up another account at a different branch of the same bank will not double your insurance.
- Save or invest through different ownership categories: Even within the same institution, you can multiply your coverage if your accounts are in different categories. For example, if you have opened two accounts with a bank—one a single checking account and another a joint savings account with your spouse—both accounts will be protected individually. You can also have money market accounts, certificates of deposit, and retirement accounts.
The bottom line
You’ve worked hard to earn and save money, and your money must be protected from events out of your control. This is why FDIC insurance is so important. Banking with an insured institution will help keep your money safe, especially in periods of recession when bank failures become more common.
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