What you need to know about bank deposits and the FDIC Deposit Insurance Fund

All week, a parade of Biden administration officials has tried to drive home the message that taxpayers will not shoulder the financial burden of a government bailout to all depositors at the two banks — Silicon Valley Bank (SVB) and Signature Bank — will have their funds immediately available.

On Monday, President Joe Biden promised Silicon Valley account holders “have access to their money today,” and that includes small businesses across the country that “bank there and have to pay payroll, pay their bills and stay open for business.” And Treasury Secretary Janet Yellen wanted to reassure Congress on Thursday that “our banking system remains strong and Americans can feel confident that their deposits will be there when they need them.”

Guaranteed deposits go beyond the Federal Deposit Insurance Corporation (FDIC) fund insurance, which promises to cover depositors up to $250,000, and only a very small percentage of those bank customers have accounts at the FDIC maximum. According to S&P Global Market Intelligence, 94% of domestic deposits at SVB were uninsured, while 90% of Signature Bank’s deposits were uninsured. This is much higher than the share of the largest US banks – about 47%, according to S&P Global.

Mr. Biden said all those depositors would be covered by the Federal Deposit Insurance Corporation fund, although shareholders and bondholders in the banks would lose their investments: “That’s how capitalism works,” Biden said.

Some of the businesses covered are large. Roku, a company with about $1.9 billion in cash, disclosed in an SEC filing last week that its $487 million in deposits with SVB are “substantially uninsured.” Roku’s remaining $1.4 billion was “allocated to several large financial institutions.” Online game company Roblox also posted securities on March 10, showing that the company had about 5 percent of the company’s $3 billion in cash and securities, or $150 million, in the bank. The company said in a statement that the bank’s collapse “will not affect the day-to-day operations of the company.”

What is a Deposit Guarantee Fund and how does it work?

Financial institutions make quarterly payments to the Deposit Guarantee Fund, or “DIF,” and their fees are based on an assessment of the institution’s size and risk profile.

The account exists to compensate insured depositors when a financial institution fails, explained Greg McBride, chief financial analyst at Bankrate.com.

“This fund is triggered in the event that a bank fails because their liabilities exceed their assets,” McBride said.

How much money is currently in the Deposit Guarantee Fund, and will there be funds if banks fail in large numbers?

According to a senior Treasury Department official, DIF had $128 billion in cash at the end of the fourth quarter of 2022, which is “completely sufficient” to cover customers of SVB and Signature Bank.

After the 2008 financial crisis, the DIF totaled $21 billion in 2009 when it had to provide funds to depositors in more than 100 failed financial institutions, which eventually poured in $128 billion in cash.

The financial hit to DIF from the collapse of SVB and Signature will depend on whether buyers are found for the assets of the failed banks and what the as-yet-unknown sale price will be, McBride said.

“The problem is not bad loans, but quality assets that are currently trading below par, so the blow to DIF can be minimized,” McBride said.

In SVB’s case, most of the deposits in excess of the $250,000 insurance guarantee were payroll for the companies, and businesses often have other methods of managing payroll accounts, including special accounts or mechanisms with additional protections, J. Michael Collins, Professor of Public Relations. and an expert in human ecology and consumer and personal finance.

Florida Republican Sen. Marco Rubio predicted on “CBS Mornings” Thursday that “every American with a bank account could be paying more in bank fees.” Rubio said banks could assess a potential fee from bank customers to pay the insurance lien.

“So you have nothing to do with that bank, people with small deposits could end up paying high fees as a result of one bank being mismanaged,” Rubio said.

What will happen to the $250,000 cap and the deposit guarantee fund in the future?

Blaine Luetkemeyer, a Republican who sits on the House Financial Services Committee and a former banker, told Politico that the federal government should temporarily insure every bank deposit in the country to boost confidence in the U.S. financial system.

But, at least for now, Luetkemeyer is in the minority.

Goldman Sachs said Wednesday that “we do not expect Congress to act on deposit insurance” at this stage.

“While some lawmakers in both parties have raised the possibility of insuring all deposits or raising the cap, other lawmakers in both parties have resisted,” Goldman Sachs said. “Increasing deposit insurance without regulatory changes appears politically difficult, but an agreement on regulatory changes will significantly slow approval.”

What to do if you have more than $250,000 in liquid assets

So how do individuals and companies with more than $250,000 in liquid assets try to protect their investments?

Since individuals are insured up to $250,000 per person, $500,000 of total deposits for married couples will be reimbursed by the FDIC. Depositors can also open accounts at multiple institutions and still be insured up to $250,000 per person, per bank, Collins said.

There are also brokerage accounts covered by the Securities Investor Protection Corporation, Collins said. Although somewhat controversial, there are also custodial accounts that use a Certificate of Deposit Account Registration Service that can cover very large deposits.

“Using a combination of these allows someone to hold very large aggregate required deposits if they want to,” said Collins, who says it’s always wise to talk to a financial advisor, especially for people with hundreds of thousands of dollars in liquid savings.

Consumer confidence in the banking sector is still shaky, and likely will be for some time. But McBride says the main thing consumers need to remember is that “your money is safe and it’s affordable.”

— Alain Sherter contributed to this report

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