When tough economic times hit the U.S. in 2007 and 2008, the constant barrage of bad news depicting bank collapses and acquisitions left customers scrambling to ensure that their hard-earned money would be protected. The Federal Deposit Insurance Corporation (FDIC) covers deposits from failed banks, and the federal government has provided assurances that it will not run out of money. But who backs up the FDIC to ensure that it remains able to cover lost deposits that occur as a result of bank collapses? Read on to find out.
Insuring the Federal Deposit Insurance Corporation
According to the FDIC, no one has ever lost a single penny of insured deposits in its 75-year history. This is good to know, but with so many failed banks in 2008 alone, many people are still skeptical.
The FDIC stated publicly in September of 2008 that it did not anticipate that there would be enough bank failures to deplete the $52 billion Deposit Insurance Fund (DIF). This fund, composed of the premiums banks pay to have their deposits insured, is controlled by the FDIC. If the DIF were to be depleted, the FDIC also has a $30 billion line of credit with the Department of Treasury and the federal government's guarantee that if the FDIC exhausts its other options, the government will step in to provide further financial backing.
The FDIC could also borrow money from the Treasury in the form of short-term loans. This occurred during the savings & loan crisis in 1991, when the FDIC was forced to borrow several billion dollars from the Treasury. (For more insight, see Bank Failure: Will Your Assets Be Protected?)
There are ways to protect yourself against a failing bank and despite the protections offered by the FDIC and the government, it is in your best interest to be cautious and do some research to ensure that your money is as safe as possible.
First, you should research the bank you are planning to put your money into. Find out whether it is financially sound and how it is rated. The best-rated banks have more solid financials and therefore tend to be more resilient businesses. If the bank you are using is heavily invested in risky and unconventional loans or other investments, this might serve as a flag of caution. To get an idea of a bank's current financial situation, go into the investor relations section on its website, read over its financial news and events, and go over its financial statements if they are made available. In a fragile economy, consumers must be more proactive in protecting their assets; after all, your hard-earned money can never be too well protected. (For some guidance on how to do this, read Analyzing A Bank's Financial Statements.)
Once you've determined your bank's financial stability, make sure your that bank is insured (some aren't) by asking the branch manager or looking for the FDIC logo. Then, check if your money is within the FDIC limit. You can visit the FDIC's Electronic Deposit Insurance Estimator to help you determine this.
In October 2008, Congress temporarily increased the amount covered by FDIC deposit insurance from $100,000 to $250,000 per depositor through December 31, 2009. The basic insurance amount is $250,000 per depositor, per bank, including principal and interest. It is possible to be covered for more than $250,000 if you have several accounts with different legal ownerships at the same bank. (For more information on FDIC coverage, read Are Your Bank Deposits Insured?)
The Recover Process
When a bank fails, account holders get their funds back almost immediately up to the insured amount. If their deposits exceed that limit , they will have to wait until the FDIC sells off the bank's assets to recoup any excess. However, if the sale of assets is insufficient to cover all deposits beyond FDIC insurance limits, account owners could receive less than the value of their accounts. Limiting your deposits to the insured amounts can help protect you from this risk.
If depositors take the right steps to protect themselves, they stand a good chance of coming out of tough economic times with their savings intact. It doesn't hurt to take all the recommended steps to protect your money, even when economic forecasts are positive. After all, the time it takes to keep your savings as safe as possible is much less costly than losing them.