Fresh off the 2nd and 3rd largest bank failures in U.S. history (Silicon Valley Bank and Signature Bank, respectively), it seems like it might be a
good critical time to do a refresher on FDIC insurance amounts, so that none of us are left holding the bag for a bank mismanaging its risk. But first, let’s do a very quick recap on how we got here.
Silicon Valley Bank (SVB) and Signature Bank were similar in that they both were overexposed to asset classes that have come under concern: SVB with low-interest long-term treasuries that had lost value with rising interest rates; Signature with overexposure to crypto firms. The other common link between the 2 banks was that around 90% of the deposits for each were uninsured (the depositors were over FDIC insurance amount coverage limits) – compared to around 50% or below at many large banks. When the uninsured depositors (mostly businesses) at each bank collectively discovered that their deposits could be at risk of not being returned to them, it prompted a good ole fashion bank run – the kind of which led to the creation of the U.S. Federal Deposit Insurance Corporation (FDIC) agency way back in 1933 after Great Depression bank runs decimated the U.S. financial system.
How did SVB and Signature avoid mismanagement scrutiny until now? Many are pointing to the 2018 rollback of post-financial crisis regulations that were put in place with the Dodd–Frank Wall Street Reform and Consumer Protection Act that was enacted in 2010. The result of the rollback was less stress-testing and regulatory oversight of bank asset management for banks through raising the asset threshold from $50 billion to $250 billion for the increased oversight. Left to their own devices, these large (but technically not large enough to face the scrutiny of increased oversight) banks mismanaged their assets and took on an unhealthy level of uninsured deposits.
The FDIC has moved to restore confidence in the banking system by taking the extraordinary step of fully backing all deposits at SVB and Signature, even the amounts that were uninsured because they were above the standard FDIC insurance coverage limits. You, however, may not be so lucky and should not rely on the same courtesy with your personal deposits now or in the future. If there is 1 lesson that each of us should take from these bank runs, it’s that each of us needs to become more familiar with FDIC insurance limits and protect our bank deposits accordingly. I’ve given an FDIC insurance overview before, but let’s dig in deeper to how FDIC insurance works, what assets are insured by the FDIC, and FDIC insurance limit caps.
How Does FDIC Insurance Work?
Long story short, FDIC member banks pay premiums in to the FDIC insurance fund. In exchange, deposits from depositors at those banks are protected, up to specified limits, in the event that the bank should fail. In theory, everyone benefits:
- Member banks benefit by limiting the possibility of bank runs by uninsured depositors.
- Depositors benefit by having their deposits protected, and the peace of mind that provides.
- The Government benefits by not having to entirely bail out and take over failed banks.
- The entire financial system benefits from more stability.
How to Find Out if a Bank is FDIC Insured
Most banks are FDIC insured, but here is an FDIC member bank search tool to help you confirm. In recent years, a number of new Fintech companies have offered bank-like products without being FDIC insured, and a few have failed, leaving customers at a loss. As a general rule, always check to see if a financial institution is FDIC, NCUA, or SIPC insured before transferring over any of your hard-earned personal funds to them.
What Types of Investments & Accounts Does the FDIC Cover?
FDIC insurance covers the following types of accounts and deposit investments:
- Checking accounts
- Negotiable order of withdrawal (NOW) accounts
- Savings accounts
- Money market deposit accounts (MMDAs)
- Time deposits such as certificates of deposit (CDs)
- Cashier’s checks, money orders, and other official items issued by a bank
It’s worth noting that similar types of investments held at a credit union are not insured by the FDIC – and are instead insured by the National Credit Union Administration (NCUA) – a similar U.S. governmental agency for credit unions. The NCUA exclusively insures credit unions, whereas commercial banks and savings institutions are exclusively insured by the FDIC. And the NCUA insurance limit amount is similar to the FDIC.
What Types of Investments & Accounts Does the FDIC Not Cover?
FDIC insurance does not cover every type of investment or account. In particular, non-deposit security-based investments such as the following are not covered:
- Stock investments
- Bond investments
- Mutual funds
- Crypto assets
- Life insurance policies
- Municipal securities
- Safe deposit boxes or their contents
- U.S. Treasury bills, bonds or notes (these investments are backed by the full faith and credit of the U.S. government)
If banks offer these types of investments (aside from safe deposit boxes), they are typically through a 3rd party investment broker – not the bank. Those 3rd party investment brokers are typically SIPC insured. Check out my SIPC insurance overview for more details.
What are the FDIC Insurance Amount Limits?
FDIC insurance amount limit is $250,000 per depositor, per insured bank, for each FDIC “account ownership category”. The 14 account ownership categories are:
- Single owner accounts
- Joint owner accounts
- Revocable trust accounts
- Irrevocable trust accounts
- Certain retirement accounts
- Employee benefit plan accounts
- Business/Organization accounts
- Government accounts (public unit accounts)
- Mortgage servicing accounts for principal and interest payments
- Accounts held by a depository institution as the trustee of an irrevocable trust
- Annuity contract accounts
- Public bond accounts
- Custodian accounts for Native Americans
- Accounts deposited by an IDI pursuant to the Bank Deposit Financial Assistance Program of the Department of Energy
The most common of these are: single accounts, joint accounts, revocable trusts, irrevocable trusts, and retirement accounts (e.g. IRAs).
Here’s a hypothetical example of FDIC insurance amount coverage limits for one family at one FDIC-insured bank:
- Spouse #1 has an individual checking account: $250,000
- Spouse #2 has an individual savings account: $250,000
- Spouse #1 has an IRA account: $250,000
- Spouse #1 and spouse #2 share a joint certificate of deposit account: $500,000 ($250,000 per depositor X 2)
- Spouse #1 has a revocable trust payable on death (POD) to 1 beneficiary (spouse #2): $250,000
- Spouse #2 has a revocable trust payable on death (POD) to 4 beneficiaries (spouse #1, child #1, child #2, and child #3): $1,000,000
In this example, each of these accounts would be additive, for a total of $2,500,000 insured. Even though some of the account categories are the same, they are owned by separate depositors (spouse #1 and spouse #2). If the same family were to have all of the same accounts at a second FDIC-insured bank, that total would effectively double.
It’s worth breaking down the last 3 accounts further. In the joint account scenario (#4), there are 2 owners, so each spouse results in a $250,000 coverage limit ($500,000 total). However, in the 1 owner payable on death to 1 beneficiary revocable trust scenario (#5), the limit drops to $250,000. When more than 1 beneficiary is listed in a revocable trust, the coverage amount limit is $250,000 per unique beneficiary (e.g. in scenario #6, 4 beneficiaries result in $1,000,000 in coverage) – but it does not also include an extra $250,000 for the original owner.
FDIC Insurance Coverage Calculator:
The FDIC lays out some FDIC insurance amount coverage limit examples here. Calculating FDIC coverage totals can get a bit murky pretty quickly. Thankfully, there is an FDIC insurance calculator to help with the task, if you are unsure.
Are CDs at Investment Brokers FDIC Insured?
One other common scenario you might be wondering about is if FDIC coverage is extended to certificates of deposit purchased in investment accounts. If the bank that issues the certificate of deposit is FDIC-insured, then the CD is covered up to $250,000. You could buy multiple CDs through one (or multiple) broker accounts, and they would be subject to the same FDIC coverage rules outlined above ($250,000 per account ownership category per bank).
FDIC Insurance Coverage Summary:
In summary, when depositing and holding funds with a financial institution:
- Make sure those funds are fully FDIC insured
- If they aren’t, move them elsewhere
Simple, but essential. We all work too hard to do otherwise.