Bank Deposit Insurance FAQ's

Bank Deposit Insurance FAQ's

Article:Kathleen Pender: Bank deposit insurance FAQs:/c/a/2008/04/21/BU3610982R.DTL

Kathleen Pender: Bank deposit insurance FAQs

Kathleen Pender

Monday, April 21, 2008
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Kathleen Pender
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Given the financial crisis, it's no surprise that I continue to get questions from readers about the safety of their bank deposits.

Today I'll answer some of the most common ones.

Q: I'm looking for high-yielding certificates of deposit, and some small banks I've never heard of are offering the highest rates. Should I trust them?

A: It's not unusual to see small banks and credit unions offering above-average rates, perhaps because they don't have the physical presence or marketing budgets of large banks. In some cases, high yields might mean a bank of any size is desperate for deposits.

As long as the institution is insured by the Federal Deposit Insurance Corp. or the National Credit Union Association and you keep your deposits under the insurance limit, you should not worry about losing money, although you could be slightly inconvenienced if the institution failed.

Both the FDIC and the NCUA are backed by the full faith and credit of the U.S. government.

Note: It is important to know the details before investing.

Q: What are the insurance limits?

A: The same limits generally apply to banks, thrifts and credit unions. The basic limit is $100,000 per person per account type per institution. In addition, each person can have a total of $250,000 in retirement accounts insured at the same institution.

A married couple could have a total of $900,000 insured at a single institution: $100,000 in the husband's name, $100,000 in the wife's name, $200,000 in a joint account, plus $250,000 in retirement accounts in each of their names at the same bank.

Depositors could get even more insured at the same institution by opening trusts in the name of certain beneficiaries, but the rules are complicated.

Remember that insurance only covers deposits such as checking and savings accounts and CDs. Mutual funds and other investments sold by banks are not insured and do not count toward the insurance limit.

Q: How can I make sure I'm not exceeding the limits?

A: For banks or thrifts, use the FDIC's Electronic Deposit Insurance Estimator at www4.fdic.gov/EDIE/ or call (877) 275-3342 toll free.

For credit unions, use the NCUA Share Insurance Estimator at webapps.ncua.gov/ins/ or call (800) 755-1030. (This number says it is for complaints but will handle other questions.)

Q: Does the FDIC insure interest, or just my principal?

A: Both, up to the insurance limit.

Q: How can I make sure a bank that says it's insured really is?

A: For banks and thrifts, go to www.fdic.gov. In the upper right corner, click on Bank Find and enter the name of the institution. Banks that show up on this Web site are insured, but many banks have similar names, so make sure you check the right one. If in doubt, call the FDIC phone number listed above.

For credit unions, go to ncua.gov/indexdata.html.

It's crucial to check this list if you are doing business with an online bank or institution outside your area. If you plan to open an online account, going through this site will take you to the bank's official Web site so you won't be tricked by identity thieves.

Q: What will happen if my bank fails?

A: Normally, the FDIC finds a healthy insured bank to take over the failed bank's insured deposits. The failed bank is closed, and "the next business day it reopens as a branch of the new organization with no interruption in service for the average customer," FDIC spokesman David Barr says.

"In cases where we haven't been able to find a buyer, we've actually mailed checks to customers within 48 hours of the failure," Barr says.

Customers who have uninsured deposits become creditors of the failed bank. Over time, they might get back all or some of their uninsured deposits, but there are no guarantees.

The same generally holds true for credit unions.

Q: What if I also have accounts at the acquiring bank and the merger pushes me over the insurance limits?

A: Deposits will be separately insured for six months from the date of the merger. CDs that mature after six months will continue to be separately insured until they mature, the FDIC says.

Q: Will the acquiring bank pay the same rate on my CDs as the failed bank?

A: The acquiring bank has the option of lowering your CD rate to a market rate, but if it does, you may redeem the CD without an early withdrawal penalty, Barr says. If the bank does not change the rate, you will have to wait until the CD matures to avoid an early withdrawal penalty.

Q: How do I know if my bank is in trouble?

A: At the end of 2007, the FDIC had 76 banks and thrifts on its "problem list." That's up from 65 at the end of the third quarter and 50 at the end of 2006 - but still low by historical standards. "In 1990, the figure stood at just under 1,500 banks," Barr says.

The FDIC does not publish this list, but its Web site provides a list of independent bank rating services at links.sfgate.com/ZDDB. Most services charge a fee.

Bankrate.com provides a free, easy-to-use rating service for banks, thrifts and credit unions at links.sfgate.com/ZDDC.

Greg McBride, senior financial analyst with Bankrate.com, says consumers should not avoid a high-yielding CD just because the issuing bank has a low rating.

"This is one area of the investment world where higher returns don't automatically mean higher risk," McBride says. "As long as you are covered by FDIC insurance, it pays to take the higher yield."

He adds, "A lot of the inconvenience of a bank failure has really been smoothed over in recent years. Last year regulators closed NetBank on a Friday. The deposits were acquired by ING Direct. This transition was so seamless that NetBank's customers with direct deposit or online bill payments saw no interruption. Their paychecks went right into the (ING) account. The money was available as if nothing had happened."

The biggest risk an investor is likely to face is reinvestment risk, he says. Suppose you can earn 4 percent on a one-year CD from a troubled or 3.7 percent from a healthy bank. You choose the higher-yielding CD, but six months later the bank fails. In the meantime, interest rates have fallen.

Note: Legality of institution to invest on is very important!

The new bank takes over and cuts your rate, forcing you to accept the lower rate or try finding a better rate in a lower-rate environment.

Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at kpender@sfchronicle.com.

This article appeared on page D - 1 of the San Francisco Chronicle
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Kathleen Pender: Bank deposit insurance FAQs


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Kathleen Pender: Bank deposit insurance FAQs