What to know about bank deposits and FDIC deposit insurance funds?

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

on Monday, President Joe Biden promised Silicon Valley Bank account holders “will receive their money as of today,” and that includes “small businesses across the country that are banked, paying payroll, paying bills and open for business.” Treasury Secretary Janet Yellen sought to reassure Congress on Thursday that “our banking system is sound, and Americans can be confident that their deposits will be there when they need them.”

Insured deposits extend beyond Federal Deposit Insurance Corporation (FDIC) financial insurance. At SVB, 94% of domestic deposits are uninsured, while 90% of signature bank deposits are uninsured, a report said. S&P Global Market Intelligence. That’s much higher than the ratio held by big U.S. banks — about 47%, according to S&P Global.

All these depositors will be insured through the Federal Deposit Insurance Corporation Fund, Mr. Biden said, however, that stock and bondholders could lose their investments in banks: “That’s how capitalism works,” Mr. Biden said.

Some of the businesses covered are substantial. Roku, a company with about $1.9 billion in cash, revealed SEC filings Last week $487 million in deposits with SVB were “mostly uninsured.” Roku’s other $1.4 billion is “distributed among several large financial institutions.” Online video game company Roblox issued securities March 10 Filing Approximately 5%, or $150 million, of the company’s $3 billion in cash and bonds is banked. The bank’s collapse “will have no impact on the company’s day-to-day operations,” the company said in a filing.

What is Deposit Insurance Fund and how does it work?

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

When a financial institution fails, the account is there to reimburse insured depositors, explained Greg McBride, chief financial analyst at Bankrate.com.

“When that funding goes into effect, if a bank fails, their liabilities will exceed their assets,” which ultimately won’t be the case with SVB and Signature Bank, McBride said.

How much is in the Deposit Insurance Fund now, and will it have funds if the banks fail?

At the end of the fourth quarter of 2022, the DIF had $128 billion in its treasury, which was “absolutely sufficient” to cover SVB and Signature Bank clients, a senior Treasury Department official said.

In the wake of the 2008 financial crisis, the DIF had $21 billion in 2009 to bail out depositors of more than 100 failed financial institutions, eventually injecting $128 billion in cash.

The financial impact DIF will take on the collapse of SVB and Signature makes it unclear whether buyers will be found for the failed banks’ assets and what the sale price will be, McBride said.

“The problem is not bad loans, but because quality assets are currently selling for less than face value, the win for DIF may be reduced,” McBride said.

In SVB’s case, deposits exceeding the $250,000 insurance guarantee are payrolls for companies, and businesses have other ways to manage payroll accounts, including special accounts or mechanisms with additional safeguards, public affairs professor J. Michael Collins said. and expert in human ecology and consumerism and personal finance.

Florida’s Republican Senate. Marco Rubio predicted on “CBS Mornings” Thursday that “every American with a bank account will have to pay higher bank fees.” Rubio said banks can assess the potential fees from bank customers to pay their insurance guarantees.

“So people who have no connection to that bank, who have small deposits, may end up paying higher fees as a result of a bank’s mismanagement,” Rubio said.

What will happen to the $250,000 limit and deposit insurance fund in the future?

Republican, House Financial Services Committee member and former banker Rep. Blaine Lutkemeyer said. Politics To boost confidence in the US financial system, the federal government should temporarily insure every bank deposit in the country.

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

At this point, “we don’t expect Congress to act on deposit insurance,” Goldman Sachs said Wednesday.

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

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

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

Individuals are insured up to $250,000 per person, and for a couple, $500,000 of total deposits are insured by the FDIC. Depositors can open accounts at multiple institutions and have up to $250,000 of insurance per bank per person, Collins said.

There are also brokerage accounts that are closed by the Securities Investor Protection Corporation, Collins said. Although somewhat controversial, there are also custodial accounts using a certificate of deposit account registration service that can cover very large deposits.

“Someone can have a very large aggregate demand deposit using a combination of these,” says Collins, adding that it’s always smart to talk to a financial advisor, especially for people with hundreds of thousands of dollars in liquid savings.

Consumer confidence in the banking sector may still be shaky for some time. But the key thing for customers to keep in mind, McBride said, is that “your money is safe — it’s available.”

— Alain Scherter contributed to this report

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