That was my belief, but it appears to be wrong. See the link I provided in post #7.
I think this is an interesting discussion. I do know people who have more than $100,000 in a single bank account (and someone who has perhaps $2M), and they’re really putting it all on the line, I guess, by not dividing it up into separate banks. It’s amazing that no bank offers additional insurance as a “perk” or attractor to some large depositors.
For brokerage accounts, SIPC applies, and the limit there is $500,000. It does apply to cash in your brokerage account, not just stock holdings:
Some brokerage houses DO offer added protection above that amount. Schwab has further coverage with Travelers Insurance, for instance. One can hold a money market or conservative income fund in a brokerage account, and enjoy SIPC protection.
WAG: Banks are selling anything that makes them money these days. Therefore:
- They don’t see a market for insurance like that.
- They are prohibitted from offering insurance like that in some way that I’m unaware of.
- It does bad things to their books.
Here are a few articles on private FDIC excess deposit insurance:
http://www.bankersonline.com/compliance/gurus_cmp080403e.html
http://findarticles.com/p/articles/mi_m6280/is_n5_175/ai_13749622
http://www.americanshare.com/public/pages/corporate/history_1.cfm
http://www.allbusiness.com/business-finance/business-insurance/378804-1.html
Be careful.
It ensures against the brokerage going belly up, but NOT for declines in the market value of your securities.
That means if your money market fund buys a short-term note and the issuer goes bankrupt, the SIPC will not cover it.
Furthermore, in the 1990s, IIRC, the SIPC was not as well backed as the FDIC.
In short SIPC insurance is in no way comparable to the type issued by the FDIC.
Well, it’s not silly: the US government actually has higher protection limits than most countries do.
The limit was raised to $100,000 in the wee hours of the morning by Congressional action during the twilight of the Carter administration. These relaxed limits played a role instigating the S&L crisis: it makes sense to encourage due diligence from large or institutional investors.
(Sketch of a debacle foretold: Reagan lowered regulatory oversight, certain banks engaged in fraudulent behavior, clever brokerages packaged a set of $100,000 CDs for their clients at high rates, and the FDIC/FSLIC/US taxpayer ended up footing the bill).
Rich folks can own short term treasury securities for investment purposes, as well as US Treasury money market funds. Try Vanguard.
Another choice would be to invest in a bank with a) a high credit rating and which is considered to be “Too Big To Fail.” In that case, the bank would have implicit backing by the Central Bank, an institution with deeper pockets than the FDIC.
One can distinguish better from worse banks by the credit rating, though this is a bit of a lagging indicator. A good place to start is with Bankrate.com’s Safe and Sound ratings.
Fitch’s website also offers credit ratings. For ratings by S&P or Moody’s, try google news. Finally, there’s the stock market for up to the minute opinions.
IIRC, during the 1990s noted economist Joe Stiglitz wanted the limit raised to $250,000.
:dubious: How does a bank insure a customer of that bank from losing all their money in that bank?
Conceptually, it’s not difficult. Imagine Aetna Insurance Co. making good on your account for amounts over $100,000 if
a) the Bank Fails and can’t pay 100 cents on the dollar
and
b) the FDIC wasn’t covering amounts above $100,000.
Generally however, the FDIC does pay off all depositors in case of failure: they don’t want to instigate an (expensive) bank run. This is not guaranteed, however.
So the bank is just acting as a third party between the customer and the insurance company?
A couple of comments:
a) Banks haven’t been especially successful in competing against brokerage houses. Part of that is due to regulation, but also I take it that they are not innovation powerhouses.
b) Remember that the quality of the insurance is only as good as the insurer.
I’m not sure what you mean.
The bank takes the depositor’s money and loans it out. Provided the value of these loans (their assets) are on par with their deposits (or liabilities) all is well.
Say the bank makes some unwise lending choices though and declares bankruptcy. The shareholders in the bank may be wiped out, but the FDIC will generally protect the depositors.
In theory, an insurance company could provide an additional level of protection beyond the FDIC. But that doesn’t mean the depositor is actually conducting direct business with the insurance company, or the FDIC for that matter.
Just to clarify, 6 month US treasury bills are currently paying 5.04% and are exempt from state income taxes. So factoring in a 5% state income tax would make them equivalent to a bank paying 5.30%.
Unlike bank CDs, there will be no penalty for early withdrawal, though there may be a brokerage fee: treasury bills can be sold on the open market before maturity. (Also the value of these securities will fluctuate somewhat.)
Those with a thrifty bent can obtain a treasury security account directly with the government. Google “Treasury Direct”.
I’ve got a little bit of experience in this area. The FDIC limit is generally $100,000 per person per ownership type per bank; account types, as listed in the page linked in post #7 above, include single accounts (which most of us have), certain retirement accounts, joint accounts, and revocable trust accounts. Note also that some of these accounts have a higher limit of $250,000; I’ve heard rumors (but have no cite) that the limit for all accounts will soon be raised to $250,000.
There is another option for someone who has, for example, $5,000,000 to put into CDs. Obviously, this person could go get CDs from 50 insured banks, but come on, that would be a massive pain in the ass, right?
Enter the Certificate of Deposit Account Registry. This is a nationwide network of banks which (for a fee, of course) will open all those accounts for you in its member banks. The banks pass the funds around among them, but the network is structured so that your local bank can use all of the funds for their usual community development-type loans that banks always do, thus keeping the benefits in your local community. In addition, you only deal with your one local member bank; you get one single consolidated statement from them, etc. As near as I can tell, from the customer’s perspective it’s exactly like having one bank account (or CD, more likely) with all your money in it.
I have no personal experience with CDARS myself (I’m about $99,400 shy of worrying about FDIC insurance limits), but bankrate.com seems to think highly of it.
I think I understand now. I think I just assumed a more direct connection between the customer and the insurance agency. Something along the lines of a hidden service fee for the “perk” that Una Persson mentioned. “Perks” aren’t free, and I wouldn’t think the bank would pay for it. Although it’s probably paid for by schlubs like me who get charged 30 for over drafting .01. :smack:
It’s not guaranteed and it doesn’t always happen.
Penn Square Bank, located in Oklahoma, grew ninefold from 1977 to 1982, lending to oil drilling companies and taking large deposits from banks. Collateral was dubious.
When they failed in 1982, the FDIC decided to pay off the under $100,000 group only.
Message to the big boys: familiarize yourself with the concept of credit analysis.
But when Continental Illinois buckled in 1984, regulators feared a chain reaction --contagion is technical term-- whereby banks that are fundamentally sound find themselves with their money tied up at Continental – and then experience their own bank run. The bank was, “Too big to fail” (but not to big to save!). So all depositors were bailed out.