How your cash accounts are insured

The second largest bank failure since the 2008 financial crisis occurred on Friday, March 10, with the collapse of California-based Silicon Valley Bank (SVB). This regional bank, which had over $200 billion in assets, catered to a niche tech market. After a bank run on Thursday, it was officially shut down by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as the receiver.

Following the bank’s demise, Moody’s Investors Service, a U.S.-based credit rating firm, cut its outlook for the entire U.S. banking sector. It also placed six other banks on review for potential credit rating downgrades.

Fortunately, SVB depositors are being protected. Although, initially, the FDIC stated that depositors would have access to only their insured deposits, the U.S. Treasury soon stepped in to backstop deposits beyond the $250,000 insurance level. In SVB’s case, about $150 billion of the bank’s total deposits of $175 billion were uninsured. If the Treasury and FDIC had not made all bank depositors whole, many individuals and businesses could have been financially ruined.

FDIC insurance

FDIC is an independent agency created by Congress to maintain stability and public confidence in the nation’s financial system. The FDIC insures deposits; examines and supervises financial institutions for safety, soundness, and consumer protection; makes large and complex financial institutions resolvable and manages receiverships.

Insurance coverage is automatic whenever a deposit account is opened at an FDIC-insured bank or financial institution. This coverage is applicable to almost all types of accounts, including individual accounts, joint accounts, business accounts, payable-on-death accounts, employee benefit plans, certain retirement plans and revocable and irrevocable trusts.

The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. This means a bank customer may have more than $250,000 of FDIC insurance coverage at their bank. For instance, a person’s individual retirement account (IRA) would be insured for $250,000. Additionally, this same person could also own a joint account, which would be insured for another $250,000, and they could own a revocable trust, which would be insured for another $250,000 or more, depending on the number of their trust beneficiaries.

The rules for revocable trust accounts (including formal trusts, payable-on-death and in-trust-for accounts) and irrevocable trust accounts will change on April 1, 2024. For trust depositors with less than $1,250,000 — which is most depositors — the FDIC expects coverage levels to be unchanged.

To help you understand your own bank coverage, the FDIC has a calculator named EDIE. Access to this calculator is available at edie.fdic.gov/calculator.html. If you have more than $250,000 at any one bank, EDIE will help you understand your FDIC coverage limits.

When a bank fails, the FDIC is quick to help. Historically, it will pay out proceeds up to the insurance limits within a few days of the bank closing. Although, when assets are being held in a trust, the FDIC may need some time to review trust documents to determine coverage limits.

If a depositor’s account balance is higher than the insurance limit, these funds would be uninsured, which means customers are at risk of losing them. Again, Silicon Valley Bank depositors were fortunate. They were made whole in the entirety by the next business day, even if they held deposits over the insurance limits. But this may not always be the case.

Eventually, some of the uninsured deposits may be recovered from the proceeds as the failed bank’s assets are sold. In other words, for the bank customer, it may take years of receiving periodic payments based on their initial claim to receive some of their uninsured funds back.

NCUA insurance

Credit union customers are not covered by FDIC insurance but by National Credit Union Administration insurance instead. NCUA insurance guarantees you will receive the money from your deposit account if your credit union goes under. It is remarkably similar to FDIC insurance coverage, guaranteeing up to $250,000 per person, per institution, per ownership category.

The NCUA is a federal agency created by Congress to regulate credit unions and insure your money. Like the FDIC, which insures bank deposits, the NCUA makes sure your credit union assets stay secure and coverage per person can be greater than $250,000 per depositor, per insured bank, for each account ownership category.

A calculator to determine your coverage is available at mycreditunion.gov/insurance-estimator. Enter your account type and owner to help you understand your NCUA coverage.

SIPC insurance

Another type of relevant insurance is the insurance provided by Securities Investor Protection Corporation. SIPC is a federally mandated, private nonprofit that protects against the loss of cash and securities, such as stocks and bonds, that are being held by a customer at a financially troubled SIPC-member brokerage firm. The limit of SIPC protection is $500,000, including a $250,000 limit for cash.

It’s important to recognize that SIPC protection is not the same as insurance for your cash at an FDIC-insured banking institution or NCUA-insured credit union because SIPC does not protect the value of any security.

SIPC also does not protect against a decline in the value of your securities, nor does it protect individuals who are sold worthless stocks and other securities. It does not protect against losses due to a broker’s bad investment advice or due to the recommendation of inappropriate investments.

Protection under SIPC is limited. The important piece to understand is this: It only protects the custody function of the broker-dealer. This means that SIPC works to restore the securities and cash that are in a customer’s accounts when the brokerage firm liquidation begins. Most customers of failed brokerage firms are protected when assets are missing from their accounts.

The risk of creditor seizure became apparent during the financial crisis of 1968-1970 when hundreds of broker-dealers were forced to merge, sell their businesses, or close their doors. Some of these firms were unable to meet their obligations to clients and declared bankruptcy. In response to the losses that investors incurred, Congress passed the Securities Investment Protection Act in 1970, which created the SIPC.

If your balances are over $250,000 at a bank or credit union, take a few minutes to use the EDIE or NCUA calculators to help you understand your insurance coverage. If you have funds that are not insured, consider adding another bank to your portfolio. These can help you protect against certain bank deposit risks.

While establishing a new banking relationship may seem overly cautious, it is better than wondering how you are going to recover from losing your uninsured deposits because your bank failed. Silicon Valley Bank’s customers were fortunate because they recovered their deposits beyond the FDIC insurance limits. Unfortunately, the customers of the next failed bank might not see the same response.

Teri Parker is a vice president for CAPTRUST Financial Advisors. She has practiced in the field of financial planning and investment management since 2000. Reach her via email at Teri.parker@captrustadvisors.com.