Knowledge Base - Banking & Financing

Getting Around the $250,000 FDIC Insurance Limit

A question we are hearing more often lately is what to do with cash on deposit that exceeds the FDIC insurance limit of $250,000. As the regulators have shut down banks, they have tried very hard to minimize the impact on depositors. In most cases they find a buyer for the failed bank and all depositors are protected. In a number of cases though, where no buyer could be found, the FDIC only paid out up the $250,000 insurance limit and large depositors have lost their excess deposits. This appears to have happened in about 5% or less of failed banks.

Some thoughts on the topic:

  • Of the banks that have been sold in Wisconsin, there has been advance warning. Usually the FDIC has given at least a public 60 day notice of need to correct serious deficiencies.
  • The federal Dodd-Frank Act which became effective on December 31, 2010 provides unlimited FDIC Insurance coverage for non-interest bearing accounts at FDIC-insured depository institutions until December 31, 2012.  As my mother use to say, you can’t have your cake and eat it too, it seems you can’t have interest and also FDIC insurance protection over the $250,000 limit.
  • Before you race out and set up $250,000 accounts at different banks, here are several items you might want to analyze or discuss with your current banker
    • In many cases, if a bank fails, the customer has a right of offset. In other words, cash on deposit can be used to offset any loans outstanding. Depending on the size of deposits vs. loans, this might provide a type of protection.
    • If your account fees are calculated on an account analysis basis, the earnings credit would at least partially offset the interest lost by maintaining your cash in a non interest bearing account.
    • Some banks are part of a multibank holding company. Maintaining separate accounts in these different banks might provide protection without increasing the difficulty of cash management.
    • It has been suggested in a company with multiple owners, having different accounts in each owners name might be a way to increase the insurance limit. I don’t like this idea because it might bring unwanted tax consequences for the owners.
  • If you decide that you will sleep better at night with the FDIC insurance protection:
    • A key question is when will you need the money? If less than 90 days, the non-interest bearing account would be safest without a significant financial downside. If it is longer than 90 days, it may be worth the extra effort of spreading it out to reduce the risk. In these cases you should consider investment options that correspond with the timing of your cash flow needs like a CD ladder. Depending on the amount, you could have 3 and 6 month CDs at one institution and 12 and 24 month CDs at another.
    • Opening one or more $250,000 accounts at different banks will also give you a chance to develop a relationship with different banks that might prove beneficial in the future.
    • It might be a way to reward a bank that has been calling on you to build a relationship without any promise of a change in the primary relationship.
    • Banks love and need deposits. This could be a great way to reward the small community bank or credit union that works hard supporting the many causes in the local community