How Much FDIC Coverage Do You Have?

In early March, Silicon Valley Bank (SVB) and Signature Bank unexpectedly collapsed. They became the second and third largest bank failures in U.S. history, respectively. The largest collapse involved Washington Mutual in 2008, precipitating the Great Recession. (See "Two Banks Collapse in One Week" below.)

The recent regional bank failures have caused many individual depositors and business owners to question whether their accounts will be protected by the FDIC and what they should do if their banks fail.

Two Banks Collapse in One Week

On March 10, 2023, Silicon Valley Bank (SVB) collapsed. On that same day, Signature Bank customers, apparently alarmed by the collapse of SVB, withdrew more than $10 billion in deposits. By March 12, Signature Bank had permanently closed.

SVB was founded in Santa Clara, California, in 1983 with the goal of supporting and investing in the volatile technology sector, including biotech. By 2021, SVB claimed to be the bank for almost half of all U.S. venture-backed startups, calling itself "the financial partner of the innovation economy." At the end of 2022, SVB held approximately $209 billion in assets, including a high percentage of government bonds that had dropped in value when the Federal Reserve raised interest rates.

Signature Bank, based in New York, had significant ties to the real estate and legal industries. One of its board members, Barney Frank, was previously a member of the U.S. House of Representatives and co-authored the Dodd-Frank Act—a law designed to protect investors in the wake of the Great Recession of 2008. In 2018, Signature Bank began branching out from its traditional business lines into cryptocurrency investments. At the time of its collapse, Signature Bank held $16.5 billion in deposits from customers with digital assets.

By March 13, both banks had essentially been taken over by the federal government. The U.S. Department of Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation indicated they would back SVB deposits beyond the federally insured ceiling of $250,000. The full details of why these banks collapsed are still being investigated.

FDIC Fundamentals

The Federal Deposit Insurance Corporation (FDIC) was founded in 1933, in the wake of massive bank failures during the Depression. FDIC coverage protects up to $250,000 per depositor, per bank, in each account ownership category. The protection extends to any person or entity with funds in an insured bank. The person doesn't have to be a U.S. citizen or resident.

The FDIC protection covers:

• Checking accounts,
• Negotiable order of withdrawal (NOW) accounts,
• Savings accounts,
• Money market deposit accounts (MMDA),
• Time deposits such as certificates of deposit (CDs), and
• Cashier's checks, money orders and other official items issued by a bank.

If a person holds deposits in separate, insured banks, each account is covered up to $250,000. However, if funds are deposited in separate branches of the same insured bank, they aren't separately insured.

Important: FDIC coverage protects depositors against institutional failures. Stolen or lost deposits will generally result in a loss to the bank, not its customers. In many instances, losses will be covered by a so-called "banker's blanket bond." This is an insurance policy that a bank purchases to protect itself from causes of disappearing funds, such as theft, fraud, fire and other natural disasters. Unauthorized access to funds may be covered by the Electronic Funds Transfer Act and other consumer protections.

The FDIC does not cover:

• Stock investments,
• Bond investments,
• Mutual funds,
• Crypto assets,
• Life insurance policies,
• Annuities,
• Municipal securities,
• Safe deposit boxes or their contents, and
• U.S. Treasury bills, bonds or notes (although these are backed by the federal government).

Important: There may be other protection for the assets above. The Securities Investors Protection Corporation (SIPC) is a nongovernment entity that replaces missing stocks and other securities in customer accounts held by its members up to $500,000, including up to $250,000 in cash, if a member brokerage firm fails. This coverage does not protect investors against decreases in the market value of investments.

Ownership Categories

There are also federal rules regarding funds depositors have in different categories of legal ownership. These ownership categories include:

• Single accounts,
• Certain retirement accounts,
• Joint accounts,
• Revocable trust accounts,
• Irrevocable trust accounts,
• Employee benefit plan accounts,
• Corporation, partnership and unincorporated association accounts, and
• Government accounts.

In terms of ownership categories, a bank customer with multiple accounts may qualify for more than $250,000 in FDIC coverage if the customer's funds are deposited in different ownership categories and the requirements for the ownership categories are met.

For example, Mr. Smith has four single accounts at Savers Bank, a hypothetical insured bank, including one account in the name of his business (a sole proprietorship). The FDIC covers deposits owned by a sole proprietorship as a single account of the individual owner. So, in this situation, the FDIC would combine Mr. Smith's four accounts. If the deposits in these accounts total $260,000, the FDIC would cover up to $250,000, with $10,000 uninsured.

On the other hand, Mr. and Mrs. Johnson hold multiple accounts at Savers Bank:

• An MMDA worth $230,000,
• A savings account with a balance of $250,000, and
• A CD worth $270,000 (with a third co-owner listed on the account).

The Johnsons' deposits at Savers Bank total $750,000. To calculate FDIC coverage, the total amount in each joint account is divided by the number of co-owners. So, Mr. and Mrs. Johnson each have the following account balances:

• An MMDA worth $115,000 (half of $230,000),
• A savings account with a balance of $125,000 (half of $250,000), and
• A CD worth $90,000 (one-third of $270,000).

Therefore, each of their deposits at Savers Bank totals $330,000. The FDIC would cover $250,000 each, leaving an uninsured balance of $80,000 each. Assuming the third owner listed on their CD has no other accounts at Savers Bank, his or her ownership share of the CD ($90,000) would be fully insured.

If Your Bank Fails

If you have deposits in an FDIC-insured bank that fails, you don't need to apply for or buy FDIC deposit insurance. Coverage is automatic. If you're unsure if your bank is FDIC-insured, ask a bank representative or use the FDIC's BankFind Suite tool.

Historically, the FDIC pays insurance within days after a bank closing, often by the next business day. This is done by either providing each depositor with a new account at another insured bank in the amount equal to the insurance balance or by issuing a check to each depositor.

In the case of SVB, the FDIC transferred all deposits—both insured and uninsured—and substantially all assets of the former SVB to a newly created, full-service FDIC-operated bridge bank. This action will protect all depositors of SVB, even those with more than $250,000 per depositor in each account ownership category.

Similarly, according to a press release, the FDIC transferred all deposits and most of the assets of Signature Bank to Signature Bridge Bank, N.A., "a full-service bank that will be operated by the FDIC as it markets the institution to potential bidders."

Both banks are offering full coverage protection of deposits, with no losses associated with the collapses being "borne by the taxpayer," according to a joint statement on March 12 by Secretary of the U.S. Department of Treasury Janet Yellen, Federal Reserve Board Chair Jerome Powell and FDIC Chairman Martin Gruenberg. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

Although the "systemic risk exception" covers depositors, the joint statement added that shareholders, certain unsecured debtholders and bank senior management won't be protected.

Covering Your Assets

In light of the recent bank failures, it may be prudent for individuals and business owners with significant account balances to divvy up their deposits between multiple account ownership categories and/or banks. Or you might decide to add another person's name to an account, such as a business partner, spouse or child. Contact your SSB advisor to determine whether your balance will be fully insured and to answer any additional questions you might have about FDIC coverage.

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