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

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

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

Guaranteed deposits extend beyond the Federal Deposit Insurance Corporation’s (FDIC) fund insurance, which promises that depositors’ funds up to $250,000 will be covered, and only a very small percentage of those bank customers had accounts below the FDIC maximum. At SVB, 94% of domestic deposits were uninsured, while 90% of Signature Bank’s deposits were uninsured, according to a report by S&P Global Market Intelligence. That’s much higher than the ratio of major U.S. banks — about 47 percent — according to S&P Global.

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

Some of the businesses covered are significant. Roku, a company that has about $1.9 billion in cash, disclosed in an SEC filing last week that its $487 million in deposits with SVB “are largely uninsured.” Roku’s remaining $1.4 billion is “distributed among multiple large financial institutions.” Online video game company Roblox also disclosed in a March 10 securities filing that roughly 5% of the company’s $3 billion in cash and securities, or $150 million, is held in the bank. The company said in the filing that the bank’s collapse “will have no impact on the company’s day-to-day operations.”

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

Financial institutions pay quarterly into the Deposit Guarantee Fund, or “DIF,” and the amount of their fees is based on an assessment of the institution’s size and risk profile.

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

“This fund comes into play in the event that a bank fails because its liabilities exceed its assets,” which ultimately may not be the case with SVB and Signature Bank, McBride said.

How much does the Bank Deposit Guarantee Fund currently have and will there be funds if more banks fail?

As of the end of the fourth quarter of 2022, the DIF had $128 billion in its coffers, which is “fully sufficient” to cover the clients of SVB and Signature Bank, according to a senior Treasury official.

As a result of the 2008 financial crisis, the DIF was $21 billion in the red in 2009 when it had to provide funds to depositors at more than 100 financial institutions that failed, ultimately taking a $128 billion cash infusion.

The financial hit DIF will take from the collapse of SVB and Signature will depend on whether buyers are found for the failed banks’ assets and what the sale price is, which is not yet known, McBride said.

“Since the problem is not bad credit, but quality assets that are currently selling below par, the hit to DIF can be minimized,” McBride said.

In SVB’s case, many of the deposits above the $250,000 insurance guarantee are payroll for companies, and companies often have other ways to manage payroll accounts, including special accounts or mechanisms with additional protections, said J. Michael Collins, professor of public affairs and human ecology and expert in consumer and personal finance.

Republican Sen. Marco Rubio of Florida predicted on “CBS Mornings” Thursday that “potentially every American with a bank account will have to pay higher bank fees.” Rubio said banks would be able to assess a fee that could potentially come from bank customers to pay their insurance bond.

“So you have people who have nothing to do with this bank, who have small deposits, could potentially be paying higher fees as a result of a bank’s mismanagement,” Rubio said.

What will happen to the $250,000 cap and the Deposit Guarantee Fund in the future?

Congressman Blaine Lutkemeier, 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 Lütkemeier is in the minority.

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

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

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

So how can individuals and companies with over $250,000 in liquid assets try to protect their investments?

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

There are also brokerage accounts that will be covered by the Securities Investor Protection Corporation, Collins said. And although somewhat controversial, there are also custodial accounts using a deposit account registry service that can cover very large deposits.

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

Consumer confidence in the banking sector is still shaky and may remain so for some time to come. But McBride said the main point customers should keep in mind is that “your money is safe – and available”.

— Alain Scherter contributed to this report

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