The Club PUBlication 03/27/2023

​Deposit insurance can buffer bank woes
CHRIS FARRELL

​Feeling a queasy sense of déjà vu with the current bank turmoil? The reverberations from troubles at Silicon Valley Bank, Signature Bank, Credit Suisse, and others bring back bad memories of the failures, rescues, and bad economic times from 15 years ago. 

There are sound reasons to believe the economic damage will be better contained this time around (fingers crossed).

Should we do more on our own to monitor the financial health of our bank or credit union before trouble erupts? “Some consumers want to dig deeper in the financials of their bank to avoid frozen deposits or other inconveniences,” writes John in an email. He wanted to know “how consumers can do their own due diligence beyond whether their deposits are FDIC insured.”

Even though banks publish a lot of numbers, the reality is their financial health is difficult for outsiders to understand.

Among the reasons listed at a Wharton School conference years ago include that banks “are credit-sensitive, they are opaque institutions, they hold illiquid instruments and they are vulnerable to sudden regime shifts.”

That’s the beauty of deposit insurance. You don’t have to understand the financials. All you need to know are the Federal Deposit Insurance Corp. rules or, if your financial institution is a credit union, the National Credit Union Share Insurance Fund. (FDIC and NCUA coverage are essentially the same.) Briefly, balances up to $250,000 per person per institution are protected depending on account ownership.

However, it isn’t hard to increase that coverage. For example, a couple could open a joint account. They are eligible for $500,000 protection on the joint bank account ($250,000 per owner) and $250,000 for each of their individual accounts at the same bank. The classic way to add coverage is to have accounts at different banks under the $250,000 limit.

Not many of us have to worry about breaching the $250,000 limit anyway.

You should still make judgments about where you bank.

I pulled my money from a too-big-to-fail bank marred by a series of scandals and deposited it into a local bank that focuses on small-business lending. (My main bank is an online bank.) I am well (and I mean well) under the insurance limits. I also think it’s prudent to deposit money at more than one insured institution.

Your money is safe, but if the FDIC does take over your bank there might be a wait before you can gain access to the account.
​
Chris Farrell is economics contributor to the Star Tribune, Minnesota Public Radio and American Public Media’s “Marketplace.”