With the collapse of Silicon Valley Bank and Signature Bank and the US government freezing all deposits at those firms, here is the state of deposit insurance in the United States:
What is the US Deposit Insurance Limit?
Currently, the Federal Deposit Insurance Corp. (FDIC) guarantees deposits of up to $250,000 per person per bank. That limit was established in law by the 2010 Dodd–Frank reform act passed after the 2008 financial crisis.
This means, for example, that a married couple sharing a savings account would be guaranteed deposits of up to $500,000. It also means that $1 million in savings can be insured if the cash is spread across four different accounts at four different banks. FDIC-guaranteed accounts include checking and savings accounts, as well as money market accounts and certificates of deposit.
Customer deposits at federally insured credit unions are protected up to at least $250,000 per individual depositor through the National Credit Union Share Insurance Fund, administered by the National Credit Union Administration.
Whose deposits are not insured?
Generally, accounts that exceed the $250,000 limit mostly belong to entities that need a lot of cash to make payroll, such as small businesses, nonprofits, or municipal governments.
Many other investments, such as stocks, annuities or mutual funds, are not protected against loss.
According to data from the US central bank, more than $9.2 trillion of US bank deposits were uninsured at the end of last year, more than 40% of all deposits.
What happened to the depositors of Silicon Valley Bank and Signature Bank?
The collapse of SVB on March 10 – the biggest bank failure since 2008 – raised concerns about whether small-business customers would be able to pay their employees if the FDIC only protected deposits of up to $250,000.
According to the FDIC, approximately 89% of SVB’s $175 billion in deposits was uninsured by the end of 2022.
On March 12, US regulators including the FDIC announced that they would make all SVB and Signature Bank depositors whole, even those with accounts greater than $250,000, to the US banking system through a “systemic risk exception”. Designed to prevent widespread contagion. The FDIC said that any losses to the FDIC’s Deposit Insurance Fund would be offset by a special assessment of the banks.
Treasury Secretary Janet Yellen denied that the emergency actions meant that a comprehensive government guarantee now existed for all deposits, and said during a congressional hearing that SVB and Signature would be looked into for any future failures. The risks would need to be similar to those in order to qualify for the exception.
In a speech to bankers on Tuesday, Yellen said the US banking system was stabilizing and that steps taken to guarantee deposits at those institutions showed a “resolute commitment” to keeping depositors’ savings and banks safe. He also clarified that the government can similarly bar smaller institutions if they too run the risk of contagion.
What if I have more than $250,000 in my bank account?
While individuals are at risk of losing their money above the deposit insurance limit if a bank fails, the FDIC often arranges for a sick lender to be sold to a peer institution, which then takes over all deposits. If the sale is not possible, the FDIC closes the bank and makes payments on the insured deposits. The process usually takes 90 days. Account holders can then attempt to recover any uninsured deposits from the liquidated assets of the failed bank.
What are the risks of uninsured deposits for banks?
For banks, the large amount of uninsured deposits poses risks of its own. FDIC research from 2018 shows that account holders with uninsured funds are more sensitive to bad news and transfer funds more quickly to protect them. This means that when a bank is in trouble, it can be seen walking out the door when money is most needed.
Generally, regulators do not discourage banks from taking uninsured deposits, as long as they manage that liquidity risk.
Can the government increase the deposit insurance limit?
Some US lawmakers have said that Congress should consider whether higher federal insurance limits on bank deposits were needed in the wake of the collapse of SVB and Signature Bank.
Senator Elizabeth Warren, a Democrat, and Senator Mike Rounds, a Republican, have questioned whether the $250,000 deposit insurance limit is still appropriate.
But raising that limit would require legislation, which could face an uphill battle in a divided Congress in an election year.
According to a Reuters report, government officials have discussed the idea of increasing deposit insurance without seeking approval from Congress, brainstorming various approaches to resolve the turmoil in banking. However, this idea was not universally supported and is not seen as necessary by some authorities.
Yellen said Wednesday that the FDIC was not considering providing “full insurance” for banking deposits in excess of the FDIC’s current $250,000 limit.
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