Have you ever worried about losing the money you deposit in your bank account? Probably not. Thanks to the FDIC, many people don’t think about bank runs or failures because it insures most bank deposits. However, the keyword is “most bank deposits.” So what about deposits that aren’t covered? In this article, we dive into FDIC insurance — what it is, what’s covered, and what you need to know about the FDIC and deposit risk as a business owner.
What is the FDIC?
Gone are the days of hiding money in a safe or under the mattress. The FDIC is an independent federal agency responsible for ensuring public confidence within the banking system. While the FDIC does this in several ways, it’s most well-known for insuring bank deposits.
Since its establishment on January 1, 1934, FDIC insurance has ensured that no one loses a penny of their insured funds. Using an FDIC-insured bank means customer deposits are protected, so they can feel confident placing money in their accounts.
What does FDIC stand for?
FDIC stands for the Federal Deposit Insurance Corporation (FDIC). This agency is fully funded by banks and savings associations, who pay premiums for deposit insurance coverage. This means that the FDIC isn’t government-funded, but its management team is a five-person Board of Directors appointed by the President and confirmed by the Senate.
How the FDIC protects your money
If a bank fails, the FDIC doesn’t swoop in with the tax-payer dollars to save the day. First, it tries to sell the loans and deposits to a solvent bank.
Your accounts will switch to the new bank if the FDIC can sell them. But if the Federal Deposit Insurance Corporation cannot sell the loans and deposits to other financial institutions, it will dip into its pool of funds from the premiums paid by banks.
However, the FDIC agency has much more to offer than just deposit insurance: It is the primary federal regulator for state-chartered banks that don’t join the Federal Reserve System. It supervises over 5,000 banks and savings associations, ensuring they live up to current consumer protection laws.
History of the Federal Deposit Insurance Corporation (FDIC)
Congress created the FDIC as a direct result of the bank failures of the 1920s and early ’30s during The Great Depression. But America’s banking system’s woes started much earlier, dating back to the 18th century.
Early U.S. bank failures and other banking system challenges
In America’s very early days, no one was concerned about bank security simply because banks weren’t closing — in fact, they were just getting started. From 1789 (when the federal government was formed), bank customers could deposit and withdraw funds without concern.
But the peace of mind was short-lived. In 1809, there was a run at the Farmers Bank of Glocester, Rhode Island. The bank issued more currency than it had in assets, and on March 24, 1809, it closed its doors. For the first time in American history, citizens grew distrustful of banks, leading to another bank failure five years later.
A bigger collapse occurred during the Panic of 1837, which contributed to multiple bank failures and an economic depression that lasted until 1841. These events started the calls for bank reform, even though nothing would happen at the federal level until 1933.
The origin story of the FDIC
Decades after the Panic of 1837, bank failures started to happen rapidly. From the famous bank failure, the Wall Street Crash of 1929, 9,000 banks suspended operations, and depositors lost $1.3 billion.
Of those 9,000 failures, nearly half happened in the first months of 1933 alone. So, the U.S. government had to step in to protect against further losses. On March 6, 1933, President Franklin Roosevelt declared a bank holiday to mitigate the losses and give Congress time to put together a deposit insurance program.
After much debate, government officials found their solution. On June 16, 1933, Roosevelt signed the Banking Act, establishing the Federal Deposit Insurance Corporation and creating a foundation for secure banking in the United States.
What the FDIC protects
The Federal Deposit Insurance Corporation (FDIC) insures the money you deposit in your checking and savings account at an FDIC-insured bank, allowing up to $250,000 per depositor. It also offers 100% protection for the following:
- Money market accounts
- Certificates of deposit
- Cashier’s checks
- Money orders
- Negotiable Order of Withdrawal (NOW) accounts
The FDIC also covers deposits in these accounts if they’re a part of your retirement account (IRA), a revocable or irrevocable trust account, an employee benefit plan, and a corporate, partnership, or unincorporated association account.
In short, you are covered up to $250,000 at the same bank, even if you have a separate business and personal account. Let’s look at how this works with an example.
An example of how the FDIC works
Darling Designs, a screen printing business, has been doing well lately. With her extra cash, Diana Darling, the owner, deposits $280,000 in her bank and splits the money between her savings, checking, and CD accounts. Here’s the breakdown:
- Checking account: $50,000
- Savings account: $150,000
- CD: $80,000
- Total: $280,000
Because Diana’s total deposits exceed $250,000, she has $30,000 sitting in the bank uninsured. So if her bank fails, she could lose that amount. But what happens if Diana deposits some of the money under her name and the rest under her business account?
If Darling Designs is a sole proprietorship, as far as the FDIC is concerned, it’s still Diana’s account. So the money is added together for a single depositor.
The bottom line is that anyone with more than $250,000 across their accounts in one bank isn’t insured beyond that amount. On the other hand, if you have a joint account with someone else, such as your spouse, sibling, or neighbor, the limit doubles to $500,000 because you and your banking partner are two depositors.
But experts don’t recommend opening a joint account with someone to get FDIC coverage. There are other ways to protect your assets.
What does the FDIC not cover?
From bank insurance to protecting consumers’ rights, there’s no question that the FDIC offers widespread protection for most bank accounts. Still, it would be best to be careful about depositing because many financial products aren’t protected. Here are the ones you should become familiar with:
- Mutual funds
- Life insurance policies
- The contents of a safety deposit box
- Municipal Securities
- Crypto assets
- U.S. Treasury bills, bonds, and notes
Are deposits in credit unions covered by FDIC deposit insurance?
The FDIC protects deposits in member banks and savings associations, not credit unions. The National Credit Union Administration (NCUA), an independent agency that administers the National Credit Union Share Insurance Fund (NCUSIF), insures credit union deposits. Like the FDIC insures deposits, the NCUSIF protects individual accounts up to $250,000.
How to file a claim with the FDIC
Bank failures are rare, but they can happen — even today: From 2001 to 2022, 561 banks went down. So what happens if your banking institution goes belly up?
The day after your bank closes, you can submit a claim directly with the Federal Deposit Insurance Corporation using the agency’s website. You can also call 1-877-ASK-FDIC to get help. As long as your accounts fall within the insured $250,000 cap, you won’t lose any money.
How to protect your business bank deposits
As a business owner, you know how important it is to take a proactive approach to risk. When it comes to your business (and personal) assets, you can take a few steps to ensure your money is protected, especially if you total more than the insurance limit of $250,000.
Tip #1: Only bank with FDIC-insured institutions
Make sure your current bank is FDIC-insured. It’s usually easy to find a bank that is: Most banks will openly share that they have FDIC insurance to attract customers because otherwise, it can’t compete with other banks that do offer deposit insurance.
To ensure your bank is FDIC-insured, you can call the institution and ask. You can also visit the FDIC BankFind for information on past and present financial institutions.
Tip #2: Open an account at a different financial institution for deposits over $250,000
Once you reach the $250,000 limit, anything over that isn’t insured. This is why staying on top of your business bank account activity is essential. If you’re getting close to the threshold or already over it, consider opening an account with another financial institution.
Remember, you can’t just open another account at the same bank. All your savings accounts, checking accounts, money market accounts, and other insured accounts are pooled together regarding depositing insurance.
One of the easiest ways around this is to create a new savings account at a different FDIC-insured bank. You can also open an account at a credit union that the NCUSIF protects. Either way, once you start with a new bank, you have another $250,000 before you reach your risk-free banking limit.
Tip #3: Bank with an IntraFi financial institution
IntraFi Network Deposits is a banking network created to serve the needs of businesses, non-profits, and high-net-worth individuals. It works by linking FDIC-insured institutions so individuals can invest in certificates of deposits (CDs) without worrying about the safety of their assets.
Instead of needing multiple accounts, your business can open an account with a bank participating in the IntraFi Network. 84% of the largest U.S. banks belong to the network, so the odds are good that you can find a bank in the network near you.
Here’s how it works: The bank you open an account with is known as the custodial bank. You deposit money using a special Deposit Placement Agreement for IntraFi Deposits. Your custodial bank will then disburse your funds throughout the network, splitting up your money in increments to $250,000.
While useful for storing a large amount of cash, you can only use the IntraFi Network for CDs. CDs accumulate interest over time, which requires you to keep your money in the account for a set period, completely untouched.
This means your funds aren’t as liquid as they would be in a checking or savings account. That’s why this option is best for putting money your business doesn’t need in a relatively safe investment vehicle that will give you a higher return than a savings account.
FDIC in action
Diana of Darling Designs has $200,000 in her account at Bank Easy. Unfortunately, Bank Easy has started to lend out more than it has in deposits. After some accounting mishaps, it realizes it doesn’t have enough liquid assets to meet all its obligations. Unfortunately for Diana, her bank ends up failing.
Because Diana is a savvy business owner, she’s made sure to choose an FDIC-insured bank to retrieve her $200,000. She also opened a CD at another bank, U.S. Banking, and moved some of the funds into her money market account once she noticed her checking account balance was close to $50,000.
As a result, she is well below the threshold at Bank Easy. Diana can file a claim with the FDIC despite their closing, which will move her insured deposits to a new bank. In the end, Diana doesn’t lose a dime.
Stay on top of your business accounts with budgeting software
The FDIC plays a crucial role in banking. Still, because it’s been a stalwart of financial institutions for nearly a century, it’s easy to take it for granted and assume you’ll never experience a bank failure. That’s why it’s essential always to know how much you have coming in and going out of your accounts. With BILL, you can keep track of that in one place thanks to automated software. Learn more about accurately tracking and simplifying your accounts receivables and accounts payables today.