What you need to know about bank deposits and the FDIC Deposit Insurance Fund

All week, a parade of Biden administration officials has tried to drive home the message that taxpayers will not bear the financial burden of the government’s guarantee that all the depositors of two failed banks — Silicon Valley Bank (SVB) and Signature Bank — will have their funds available to them immediately.

On Monday, President Joe Biden swore that Silicon Valley Bank account holders would “have access to their money starting today,” and that included “small businesses across the country who bank there and need to make payroll, pay their bills and stay open for business.” And Treasury Secretary Janet Yellen sought to reassure Congress on Thursday that “our banking system remains healthy and Americans can feel confident that their deposits will be there when they need them.”

The guaranteed deposits extend beyond the Federal Deposit Insurance Corporation (FDIC) fund insurance, which promises depositors’ funds up to $250,000 will be covered, and only a very small percentage of those bank customers had accounts below the FDIC maximum. At SVB, 94% of domestic deposits were uninsured, while 90% of Signature Bank’s deposits were uninsured, according to a report by S&P Global Market Intelligence. That’s far higher than the share of large US banks – about 47% – according to S&P Global.

Sir. Biden said all those depositors would be covered through the Federal Deposit Insurance Corporation fund, even though stock and bond owners in the banks would lose their investments: “That’s how capitalism works,” Mr. Biden.

Some of the companies covered are significant. Roku, a company that has about $1.9 billion in cash, disclosed in an SEC filing last week that its $487 million in deposits with SVB “are largely uninsured.” Roku’s other $1.4 billion is “spread across several major financial institutions.” Online video game company Roblox also disclosed in a March 10 securities filing that about 5% of the company’s $3 billion in cash and securities, or $150 million, was held in the bank. The company said in the filing that the bank’s collapse “will have no impact on the company’s day-to-day operations.”

What is the Deposit Insurance Fund and how does it work?

Financial institutions make quarterly payments to the Deposit Insurance Fund or “DIF”, and the amount of their fees is based on an assessment of the institution’s size and risk profile.

The account exists to reimburse insured depositors when a financial institution fails, explained Greg McBride, financial analyst at Bankrate.com.

“Where that fund comes into play is in the event that a bank goes bankrupt because their liabilities exceed their assets,” which may not ultimately be the case with SVB and Signature Bank, McBride said.

How much does the Deposit Insurance Fund have now, and will it have the funds if more banks go bankrupt?

By the end of the fourth quarter of 2022, DIF had $128 billion in its coffers, which is “fully enough” to cover SVB and Signature Bank customers, according to a senior Treasury official.

In the wake of the 2008 financial crisis, the DIF was $21 billion in the red in 2009 as it had to raise funds for depositors in the more than 100 financial institutions that had failed, ultimately taking a cash injection of $128 billion.

The financial hit DIF will suffer from the collapse of SVB and Signature will depend on whether buyers are found for the bankrupt banks’ assets and what the sale price is, which is so far unknown, McBride said.

“Because the problem is not bad loans, but quality assets that are currently selling for less than face value, the scope for DIF can be minimized,” McBride said.

In SVB’s case, many of the deposits that exceeded the $250,000 insurance guarantee were payroll for businesses, and businesses often have other ways to manage payroll accounts, including special accounts or mechanisms with added protections, said J. Michael Collins, professor of public affairs. and human ecology and an expert in consumer and personal finance.

Republican Sen. Marco Rubio of Florida predicted on “CBS Mornings” Thursday that “potentially every American with a bank account will have to pay higher bank fees.” Rubio said banks would be able to assess a fee that could potentially come from bank customers to pay their insurance guarantee.

“So you have people who have nothing to do with the bank, who have small deposits, could potentially pay higher fees as a result of the mismanagement of a bank,” Rubio said.

What will happen to the $250,000 cap and the Deposit Insurance Fund in the future?

Rep. Blaine Luetkemeyer, a Republican, member of the House Financial Services Committee and a former banker, told Politico that the federal government should temporarily insure all bank deposits in the country to boost confidence in the U.S. financial system.

But at least for now, Luetkemeyer is in the minority.

Goldman Sachs said Wednesday that at this time, “we do not expect Congress to act on deposit insurance.”

“While some lawmakers from both parties have raised the possibility of insuring all deposits or raising the cap, other lawmakers from both parties have expressed opposition,” Goldman Sachs said. “Increasing deposit insurance without accompanying regulatory changes looks politically difficult, but an agreement on regulatory changes will significantly slow approval.”

What to do if you have more than $250,000 in liquid assets

So how can people and businesses with more than $250,000 in liquid assets try to protect their investments?

Since individuals are insured for up to $250,000 per person, for a couple, $500,000 in total deposits would be covered by the FDIC. Depositors can also open accounts at multiple institutions and still be insured for $250,000 per person, per bank, Collins said.

There are also brokerage accounts that would be covered by the Securities Investors Protection Corporation, Collins said. And although somewhat controversial, there are also deposit accounts that use a Certificate of Deposit Account Registry Service that can cover very large deposits.

“Using a combination of these can allow someone to hold very large total demand deposits if they wanted to,” said Collins, who says it’s always wise to talk to a financial advisor, especially for those with hundreds of thousands of dollars in liquid savings.

Consumer confidence in the banking sector is still shaken and may be for some time. But McBride said the most important thing for customers to remember is that “your money is safe — and it’s available.”

— Alain Sherter contributed to this report

Leave a Reply

Scroll to Top
%d bloggers like this: