How Safe Are FDIC-Insured Bank Accounts?

When a series of banks started failing last year, federal officials said consumers’ money was safe and guaranteed, as long as their financial institution was insured by the Federal Deposit Insurance Corporation (FDIC).

Now, it’s becoming clear that the FDIC has its limits. According to an Aug. 23 report by Richard Bove, the vice president of equity research at Rochdale Securities, another 150 to 200 banks may fail in the aftermath of the credit crunch yet, and if they do, the FDIC could need more money to secure consumer deposits.

The FDIC’s Deposit Insurance Fund is now at its lowest point since March 2003, down to around $10 billion in June 2009 from more than $40 billion in June 2008, according to Bove. As that reserve has dwindled, the number of troubled banks has climbed to 250, and 81 have failed so far this year. During the 12 months prior to March 31, 44 banks failed and cost the Deposit Insurance Fund an estimated $20.1 billion, according to the FDIC. At the end of the first quarter of this year, the FDIC had $13 billion in its fund, and its reserve ratio (the balance of the fund divided by insured deposits) stood at 0.27%, its lowest point since 1993.

Regardless of the fund’s level and the stunning speed of its decline, all sources interviewed for this article said that the government plans to do everything in its power to keep it from running dry. As the fund loses money from bank failures, the FDIC replenishes it by charging its member banks a special assessment fee, which is essentially an insurance premium. Riskier institutions have to pay more, based on a risk assessment that includes supervisory issues, leverage ratios and loans that are past due, says Andrew Gray, a spokesman for the FDIC.

“After everything that went on in the past year that fund got somewhat depleted… so the FDIC felt it was prudent to increase the premiums,” says Carol Kaplan, a spokeseoman for the American Bankers Association, an industry trade group.

The assessment fee for all insured banks went from $1 billion in December to $2.6 billion in March, according to Bove. He projects additional special assessment fees in the fourth quarter of this year and the second quarter of next year to build up the FDIC’s reserves. In addition, the FDIC has also been granted a $100 billion line of credit with the U.S. Treasury.

Here’s what consumers need to know.

What does FDIC insurance cover?

Concerned consumers should confirm that accounts at their bank are FDIC-insured. That way, even if the bank fails, you won’t lose your money.

Use the online estimator tool at MyFDICinsurance.gov or call 1-877-ASK-FDIC.

In 2008, the FDIC increased the amount of money it insures per individual per bank from $100,000 to $250,000 until Dec. 31, 2013. That means that account holders can have up to $250,000 insured in a checking or savings account, certificate of deposit or money-market account, collectively in one bank. In addition, you can have a joint account with a spouse for up to $250,000.

If you have more than $250,000 in deposits, consider signing up for a Certificate of Deposit Account Registry Service (CDARS), a program in which you can deposit more than the insured limit with one participating bank, says Jim Chessen, the chief economist at the American Bankers Association. Your bank will swap the amount in excess of $250,000 to another bank so that you maintain full FDIC protection on your investment. The money is at multiple banks, but you sign one agreement with the participating bank of your choice, earn one interest rate on all your accounts, and receive a regular statement. To locate a bank that offers this program in your region, click here.