FDIC Insurance: what does it mean for you?

[DHK]

First, here's the official FDIC website:

http://www.fdic.gov/

NCUA for credit unions:
http://www.ncua.gov/

First, why do we need the FDIC? The FDIC insurance is available for almost every bank account and it is a consumer protection benefit should the institution be bought, sold or go BK.

You can get more FDIC coverage by:
1) Open bank accounts at multiple institutions.
2) Open multiple types of accounts at those institutions.

Basically, if you open an account by yourself, you are entitled to $100k of coverage. If you have an additional joint account with your spouse, that's an additional $100k of coverage. If you have a TRUST account, that's even MORE coverage.

Of course, you'd want to make sure you're doing your banking with a company that'll be around. The bank I work for has been around for 150 years, so I kinda "joke" with people when they ask about the FDIC coverage - "we're not going anywhere!"

Now, for your bank to have the FDIC coverage, the FDIC has multiple (hundreds) of regulations that the bank must follow to be eligible. It keeps all banks playing by the same set of rules (and banks can choose to be more conservative or liberal within those set rules). That's one reason that there are so many policies - it's to keep the FDIC insurance to keep your accounts protected.

[rgates1]

How the heck do millinoares and billionares get all their money insured?

rg

[Ravenous Wolf]

rgates, I never really thought about that before.

When I worked in as an accountant for a homebuilder, we had multiple accounts since some of the deposits exceeded what was insured. Not that we kept all that liquid all the time but those accounts were actually like a trust account, for deposits, contractual obligations, etc…

However, I assume that Bill Gates and other do not keep that kind of money liquid. There are plenty of safe kinds of investments that earn better interest than being in a checking or savings account.

But I am now curious to how very rich people maintain their liquid money or at least before it does get funneled to somewhere else...

[Ravenous Wolf]

rgates, here is an article I found on Bankrate.com which explains how to get around that 100k limit. It is interesting and I always wondered how rich people got around that.

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CDARS: An easy way to beat $100,000 FDIC limit
By Laura Bruce • Bankrate.com

When Joan Delaney's elderly father began losing his sight and hearing, he decided to sell his house and downsize his lifestyle. The sale, along with a lifetime of smart financial management, left him with a sizeable amount of money to invest. Given his advanced age, the stock market was out; certificates of deposit were in.

Delaney was put in charge of depositing the money in various banks so that it would all be FDIC insured.

"He was always saying, 'Don't put more than $100,000 in any one bank,'" Delaney remembers. "But it's time consuming running from bank to bank. I was trucking Dad around to the banks to sign power of attorney cards. And back when CD rates were high he wanted things moved from one bank to another."

Now there's a program that might have solved Delaney's problem. It allows you to keep up to $5 million -- should you be so fortunate -- invested in CDs at one bank, and have it all covered by FDIC insurance. It's called the Certificate of Deposit Account Registry Service or CDARS, pronounced cedars.

Here's how it works.

Sally Jones has $130,000 she wants put in CDs in bank A. Bank A gives her CDs worth $95,000 -- leaving a little room for interest -- and sends Sally's remaining $35,000 to a company that knows bank B will issue Sally a CD for the remaining $35,000. In return, bank B buys $35,000 in CDs for its customers from bank A.

The company in the middle is Promontory Interfinancial Network. It acts as a sort of clearinghouse, matching deposits from one institution with another so funds that a bank places with CDARS essentially remain on the bank's balance sheet.

"Prior to CDARS, if you wanted to insure more than $100,000, you had to do it through (different categories of legal ownership.) Now you can title it any way you want and we can cover it through the CDARS program," says Russell Pemberton, vice president at Pulaski Bank.

Your bank sets the interest rate for the CDs bought through other banks. If Sally wants her excess money to buy a two-year CD and her bank, bank A, is paying 2 percent on that maturity, then bank B will issue the CD at 2 percent even if they're paying more or less.

"From the customer's perspective it's invisible," says Promontory's President Mark Jacobsen.

"If I'm paying more for your customer's money and you're paying less for mine, we swap the difference at present value. Say the difference is $250, you'd give me the $250 up front and then it's like we're issuing CDs at the same rate."

One drawback to the convenience of CDARS is that you can miss out on higher rates offered by banks other than your own. If you're willing to do a little extra legwork, you could get around that by finding a bank in the CDARS network that you believe consistently offers higher rates and open an account with them specifically for CDs.

Another factor is that banks pay a fee to join the network and then pay transaction fees. Some banks pass those costs on to CD buyers by reducing the interest rate, says Angela Baker, treasury officer at Allegiant Bank.

"We set CD rates every Tuesday and we've built in those transaction fees for CDARS. We reduce the baseline interest rate by 15 basis points across all maturities."

Pemberton, who says his bank's customers have bought $5 million to $6 million in CDs through the CDARS program the past three months, says customers are willing to pay for the convenience.

"We price CDARS (interest rate) a little bit less than one of our weekly CD specials. The value with CDARS is the extended FDIC coverage. You're going to pay a little something for that. People have been very receptive; they understand the value."

Adding to CDARS value is the convenience factor of one consolidated statement from your bank detailing your CDs. But while you know exactly where your money is, the other banks don't know you by anything other than an account number. The only institution, other than your own bank, that sees your personal information is the Bank of New York, which handles the CD transactions for all the banks in the CDARS network, according to Jacobsen.

Eventually, you should be able to place a CDARS order any business day, but for now, orders are placed once a week. The minimum order is $10,000. In other words, you'd need $100,000 on deposit in your bank and at least $10,000 for deposit in another bank within the network.

There are approximately 500 banks currently in the network, primarily community and regional banks. Promontory is run by three former banking regulators who, according to Jacobsen, former chief of staff of the Office of the Comptroller of the Currency and also of the FDIC, wanted to help smaller banks compete on the national level.

"It's done by developing the notion of synthetic size. It's a way to help banks work together, work more effectively. Most of these institutions don't have direct access to the capital markets. They have higher cost of funds, and more of a need to raise funds locally. When a Bank of America borrows it gets money (at a very low rate.) Most of our banks can't even fathom that."

Joan Delaney says the CDARS program may mean CD investors will be better informed about protecting their money through FDIC insurance.

"Every time I would go to a bank and move things around I would specifically ask about FDIC insurance. They never said anything to me like, 'Are you aware that cumulatively you have more than $100,000 in this bank and you're not insured?'

"After all, they give better rates on jumbo CDs. I wouldn't say they lie. It's just if you don't ask the right questions, they don't volunteer."

Check the CDARS Web site for a list of banks participating in the CDARS program.

-- Posted: Aug. 20, 2003

[DHK]

I wanted to post here for the "record" on how it is possible to have more than $100k in deposit insurance.

It's called Private Insurance and it's something that Patelco credit union members have as an added benefit for banking with them.

Patelco offers PRIVATE insurance by American Share Insurance. What they do is insure the institution and each ACCOUNT (not the account holder, but the ACCOUNT) for $250,000 EACH!

So, if you have a savings and a checking account, you're covered for $500,000!

How do they do it? They must be more stringent in their auditing of financial institutions than the FDIC and NCUA (to have it make business sense).

Here's the link:
http://www.americanshare.com/public/index.cfm

[DocDon]

I was thinking hedge accounts.....