What 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 shoulder the financial burden of the government’s guarantee that two failed banks — Silicon Valley Bank (SVB) and Signature Bank — will all be bailed out. Depositors will have Their funds are immediately available to them.

on Monday, President Joe Biden made the pledge. that Silicon Valley Bank account holders “will continue to have access to their money today” and that this includes “small businesses across the country that bank there and have the ability to get paid, pay their bills and stay open for business.” need.” And Treasury Secretary Janet Yellen on Thursday sought to reassure Congress that “our banking system is stable, and that Americans can feel confident that their deposits will be there when they need them.” ”

Guaranteed deposits extend beyond Federal Deposit Insurance Corporation (FDIC) fund insurance that will cover depositors’ funds up to $250,000, and only a very small percentage of these bank customers have accounts under the FDIC maximum. At SVB, 94% of domestic deposits were uninsured, while 90% of Signature Bank’s deposits were uninsured, according to a report. S&P Global Market Intelligence. That’s much higher than the proportion of large U.S. banks — about 47%, according to S&P Global.

Mr Biden said all those depositors would be covered by the Federal Deposit Insurance Corporation fund, although equity and bondholders in the banks would lose their investments: “That’s how capitalism works,” Mr Biden said. said

Some of the businesses covered are large. Roku, a company with about $1.9 billion in cash, disclosed. SEC Filings Last week that $487 million of its deposits with SVB are “largely uninsured.” Rocco’s other $1.4 billion is “distributed among several large financial institutions.” Online video game company Roblox also disclosed in a March 10 securities filing. Filing that the company’s $3 billion in cash and securities, or about 5% of $150 million, was held in the bank; The bank’s liquidation “will have no impact on the day-to-day operations of the company,” the company said in the filing.

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

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

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

“Where that fund comes into play is if a bank fails because its liabilities exceed its assets,” which ultimately may not happen with SVB and Signature Bank, McBride said. , McBride said.

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

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

In the wake of the 2008 financial crisis, the DIF was $21 billion in the red in 2009, when it had to provide funds to depositors at more than 100 failing financial institutions, which ultimately took a cash infusion of $128 billion.

McBride said the financial loss to DIF and the signatures due to the collapse of SVB will depend on whether buyers are found for the failed banks’ assets, and what the sale price is, which is still unknown. .

“Since the problem is not bad loans, but quality assets currently selling for less than they are worth, the damage to DIF can be mitigated,” McBride said.

Public affairs professor J. Michael Collins said that in SVB’s case, the reserves for the companies above the $250,000 insurance guarantee were payrolls, and businesses often have other ways to manage payroll accounts, including special Accounts or mechanisms with additional protections are included. and experts in human ecology and consumer and personal finance.

Sen. Marco Rubio, Republican of Florida, predicted on “CBS Morning” Thursday that “every American who has a bank account is going to have to pay higher bank fees.” Rubio said banks will be able to estimate the fees that could potentially be charged to banking customers for paying their insurance guarantees.

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

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

Rep. Blaine Leutkemeier, a former banker and member of the House Financial Services Committee, said in a statement. Politics The federal government should temporarily insure every bank deposit in the country to increase confidence in the US financial system.

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

At this stage, “we do not expect Congress to act on deposit insurance,” Goldman Sachs said Wednesday.

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

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

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

Since individuals are insured 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 up to $250,000 per person per bank, Collins said.

There are also brokerage accounts that would be covered by the Securities Investor Protection Corporation, Collins said. And although somewhat controversial, there are also custodial 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 have a much higher aggregate demand deposit if they want to,” said Collins, who says it’s always wise to talk to a financial advisor, especially those who For those who have millions of dollars in liquid savings.

Consumer confidence in the banking sector is still shaky and may be for some time. But McBride said the main point consumers should keep in mind is that “your money is safe — and it’s available.”

— Elaine Sherter contributed to this report.