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 get the message across that taxpayers will not bear the financial burden of the government’s guarantee that all depositors at two bankrupt banks – Silicon Valley Bank (SVB) and Signature Bank — will have their funds immediately available.

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

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

Mr Biden said all of these depositors would be backed by the Federal Deposit Insurance Corporation’s fund, although stock and bond holders in the banks will lose their investments: “That’s how capitalism works,” Mr Biden said.

Some of the companies covered are sizeable. Roku, a company that has about $1.9 billion in cash, revealed in an SEC filing last week that its $487 million in deposits with SVB are “largely uninsured.” Roku’s other $1.4 billion is “divided across multiple 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 not affect the company’s day-to-day operations.”

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

Financial institutions make quarterly deposits into 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, explains Greg McBride, chief 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 ultimately may not be the case with SVB and Signature Bank, McBride said.

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

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

In the aftermath of the 2008 financial crisis, the DIF was $21 billion in the red in 2009, when it had to provide money to depositors of the more than 100 financial institutions that had gone bankrupt, ultimately bringing in $128 billion in cash .

The financial blow the DIF will take 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 as yet unknown, McBride said.

“Since the problem is not bad loans, but quality assets currently selling for less than face value, the blow to the DIF can be minimized,” McBride said.

In the case of SVB, many of the deposits above the $250,000 insurance guarantee were corporate payrolls, and companies often have other ways to manage payroll accounts, including special accounts or mechanisms with additional protections, said J. Michael Collins, a professor of public affairs and human rights ecology and an expert in consumer and personal finance.

Florida Republican Senator Marco Rubio predicted on “CBS Mornings” Thursday that “potentially every American with a bank account will face higher bank fees.” Rubio said banks could 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 that bank, who have small deposits, who could potentially pay higher fees as a result of one bank’s mismanagement,” Rubio said.

What will happen in the future with the $250,000 limit and the Deposit Insurance Fund?

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 every bank deposit in the country to boost confidence in the US financial system.

But for now, Luetkemeyer is in the minority.

Goldman Sachs said Wednesday that at this stage “we don’t expect Congress to take any action on deposit insurance.”

“While some legislators from both parties have raised the possibility of insuring all deposits or increasing the limit, other legislators from both parties have voiced their opposition,” Goldman Sachs said. “Increasing deposit insurance without associated regulatory changes appears politically difficult, but an agreement on regulatory changes would significantly delay approval.”

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

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

Since individuals are insured for up to $250,000 per person, $500,000 in total deposits would be covered by the FDIC for a couple. Depositors can also open accounts with 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 while 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 allows someone to hold very large aggregate demand deposits if desired,” says 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 shaky and may be for a while. But McBride said the main point customers should keep in mind is that “your money is safe — and it’s available.”

— Alain Sherter contributed to this report

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