If you’ve been reading the news lately, you may have heard of the recent failure of Indymac Bank. After facing a liquidity crisis by making too many high risk loans, Indymac has been officially taken over by the FDIC. This is the second largest bank failure in United States history, and it is expected that the FDIC will have to disburse 4 to 8 billion dollars to the former customers of Indymac, or 10% of the total FDIC fund. The past few days have seen lines of angry people trying to withdraw their funds from the failed bank, but what many of them don’t know is they may not walk out with all their money.
What Is the FDIC?
Most people aren’t fully aware of exactly what the FDIC is, much less what their rights are under it. Most know that a bank with an FDIC seal is a good thing, but not why. The Federal Deposit Insurance Corporation was created after the stock market crash and massive bank failures of the Great Depression. During that time, people were simply out of luck if a bank failed. Once the bank closed, the customers usually were broke (hence the tendency of many of our grandparents to stuff money under the mattress). To counteract the devastating effect this had on the rest of the country, the government created a corporation to insure depositors money.
Account holders are now insured for up to $100,000 on regular deposit accounts, such as checking, savings, or CDs (A recent change to law in 2005 changed the coverage of IRAs from the standard $100,000 to $250,000). Because the FDIC has taken over Indymac, each customer is only allowed to withdraw up to that $100,000 limit. Customers who had more than that in their accounts will have to sue Indymac for the balance, which could take years and never result in a payout. So does this mean you’re screwed if you have more than $100,000 in your bank? Not necessarily, if you know how the system works.
The Breakdown
The FDIC has a few rules that, once you know how they work, can cover every penny you have.
- Each depositor is covered for up to $100,000 for accounts held in their name at a financial institution that is a member of the FDIC.
- If the depositor has accounts at another institution in addition to the first, the depositor is covered for $100,000 at the second institution as well. Therefore the depositor will have $200,000 of coverage between the two banks. Have accounts at eight banks? You have $800,000 of coverage, as long as you don’t exceed the $100,000 limit at any one bank.
- Accounts held in a different title are considered separate. Joint accounts, trusts, or beneficiary accounts are all considered to have their own $100,000 coverage.
The rules get a little more complicated the more spread out the money gets, but these are the basics that would apply to most people. Remember that banks aren’t guaranteed to be around forever, so you should take as many precautions as you can to protect your hard earned cash.
