Financial Crisis F.A.Qs – Is my bank safe?

The economic stress that has come with the Coronavirus crisis has many physicians concerned about their legal and financial security. One common asset protection question we get during a recession is about bank solvency risk, especially in light of the last recession. 

Whenever dealing with U.S. government rules and regulations, including any tax questions, I always advise looking to the source itself first. Much of what I summarize below comes directly from the official ‘fdic.gov’ website. Keep in mind that this is always general information, and not specific legal or financial advice. 

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What is FDIC deposit insurance?

FDIC deposit insurance covers the depositors of a failed FDIC-insured depository institution dollar-for-dollar, principal plus any interest accrued or due to the depositor, through the date of default.

What happens when a bank fails?

As the insurer of the bank's deposits, the FDIC pays insurance to depositors up to the insurance limit. Historically, the FDIC pays insurance within a few days after a bank closing, usually the next business day, by either (1) providing each depositor with a new account at another insured bank in an amount equal to the insured balance of their account at the failed bank, or (2) by issuing a check to each depositor for the insured balance of their account at the failed bank.

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What is The FDIC Insurance Limit?

The FDIC states the standard insurance amount is “$250,000 per depositor, per insured bank, for each account ownership category”. The FDIC describes eight distinct ownership categories that allow spreading deposit risk between multiple kinds of distinct accounts at the same bank so you may have a multiple of $250K in covered accounts, at each insured bank you have accounts with. 

What kinds of accounts are covered?

If your bank is actually FDIC insured, the following forms of deposits are insured:

• Checking and Savings Accounts 

• Negotiable Order of Withdrawal (NOW) accounts

• Money market deposit accounts (MMDA)

• Time deposits such as certificates of deposit (CDs)

• Cashier's checks, money orders, and other official items issued by a bank

There is also a significant and specific list of exclusions from this coverage, including stocks, bonds, mutual funds and annuities among others, even if purchased at an insured bank, that you should know.

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What if my accounts are owned by my revocable living trust? 

The good news is that the FDIC recognizes that a single trust may have a large account or multiple accounts that represent the interests of multiple people (the future beneficiaries of your trust). This means that the total coverage on a covered account may be a significant multiple of the $250K single account coverage limit, and may be insured up to $250K for each beneficiary. For example, a revocable trust for a family with five beneficiaries with equal interests, with $1,250,000 in total deposits, would be fully covered ($250K X 5). There are separate rules and limits for trusts with more than five beneficiaries and if the beneficiaries have equal interests in the trust or not, as well as for irrevocable trusts. 

Are gold, jewelry and other valuables in a safe deposit box, safe?

Generally, yes, but not through FDIC coverage. In the event of a bank failure, in most cases an acquiring institution would take over the failed bank's offices, including locations with safe deposit boxes. If no acquirer can be found, the FDIC would send boxholders instructions for removing the contents of their boxes. At worst, this should mean that even if your bank fails and never re-opens (possible, but unlikely) your box is safe and will be returned to you, just perhaps after a significant delay. 

Safe deposit boxes are not insured by the FDIC for robbery, loss, or destruction of the contents. Every bank has its own rules and coverage limits dictated by the contract you signed with the bank when you rented the safe deposit box. Some banks may make a very limited payment if the box or contents are damaged or destroyed, depending on the circumstances. If you are worried about about the safety or replacement of items you have put in a safe deposit box, you should consider purchasing fire and theft insurance. Such insurance may be available as part of a homeowner's or tenant's insurance policy for a residence and its contents, so consult your insurance agent to see if you are covered adequately, if at all.