As I understand it, the federal government insures your bank deposits up to $100,000. Just in case the bank goes out of business (if that’s possible?), gets robbed, burns down, etc. So my question is : what if you have more than $100,000 in the bank?
Say, you have $1,000,000 in there, and something happens to the bank. Are just shit out of luck for $900,000?
(that last sentence is supposed to say : are you just shit out of luck for $900,000?)
It depends on how many accounts you have and how they are titled. If it’s all in one account, then you’re definitely out of luck,but there are ways to have more than $100,000 insured in the same bank by using joint accounts and/or trust accounts.
If you have multiple accounts in your name (checking, savings, CDs), you’re only covered for $100,000 total. I’m not sure how it works with joint accounts.
The rule is $100,000 per beneficial interest, per depository institution.
Banks have been known to go bankrupt (hence the term.)
Spreading the money out over multiple institutions is a good idea.
For those with over $100,000, quite a few institutions will do this for you, yet still provide one comprehensive statement.
The FDIC insurance may be moot. Most scenarios that you could think of for multiple bank failures necessarily have runaway inflation as a condition. This situation would be worsened by the government printing more cash to cover bank failures through FDIC.
Inflation like this, with multiple causes would make your cash take both barrels from the devaluation shotgun. It would probably be so much toilet paper.
Diversification is the key as always. If all your money is at the bank, you are placing a large and speculative bet on US currency, interest rates, and inflation.
A certain portion in real estate, stocks, bonds, and commodities will lessen risk and increase your overrall real returns in the long run.
According to my husband, a financial advisor for PaineWebber:
The FDIC will secure your bank account up to $100,000. That does not mean that anything over that you are guaranteed not to get back. That simply means that your guarantee ends at $100,000. So it is possible to get some of your loss back, there’s just no guarantee.
If you put your money in a brokerage firm, even if it’s just a money market, they will also insure it. For example, PaineWebber insures the account up to $50 million dollars.
So if someone had a boatload of money, they’d probably be better off putting that money to work in a brokerage firm rather than a bank. Especially since they’d get a higher interest rate at the brokerage firm.
FYI: I most certainly is possible for banks to go bankrupt. Banks make loans to various people and institutions all the time. Inevitably, some of the loanees can’t repay the money, and the bank get burned. If too many loans “default” in too short a time, the bank will go broke. This is what happened in the Savings & Loan collapse several years ago. The S&L’s thought that Latin America was about to undergo a huge economic boom, so they made alot of very risky loans. They thought everything would be OK, since South America would be rolling in bolivars and pesetas in a few months. Well, the boom never occured. Loans defaulted all over the place, and the S&L’s lost their shirts, and had to beg the U.S. government to bail them out.
There was a case like this in the Chicago area maybe 5 or 10 years ago. A family pooled their money (close to $1 million, IIRC) to buy a business and kept it in one account until closing. The bank (or S&L) went bankrupt and the FDIC (or the similar S&L insurance program) reimbursed them only for $100,000. If they had kept the money in separate accounts, each totaling $100,000 or less, they would have gotten all their money back.
Deposit insurance works pretty much like any insurance policy. Each member bank pays a monthly premium, based on their total deposit base, to the Federal Deposit Insurance Corp. The FDIC holds that money until a member bank is declared insolvent, at which time the affected customers are reimbursed the by the FDIC the total amount of their
account(s) or the coverage limit, whichever is lower.
If I have an account with $200,000 at one bank, I am covered up to $100,000. If I have a joint account with another person for $200,000, the whole amount is guaranteed ($100,000 for each account owner).
Actually, FDIC insurance works about as well as any government program–that is to say, not very well. While you can spread your money around to maximize your coverage (my bank recommends putting $100,000 in your children’s accounts as well), the fact remains that the FDIC is largely insolvent. The last estimates I heard were that there was about a nickel in reserve for every dollar insured. It used to be more, if memory serves, but the S&L crisis of the 1980s drained it. (Yes, I know that S&Ls are technically backed by the FSLIC, not the FDIC, but I’m way too lazy to look up the connection).
In the case of even a moderate-size bank failure, then, I wouldn’t expect to be getting ten cents on the dollar (unless, as a previous poster mentioned, the government cranks up the printing presses, leading to rampant inflation). Plan to wait months for your pittance, too, since the feds are johnny-on-the-spot about taking your money, but plenty pokey about giving it back.
I keep my money in a private money market account, which gives CD interest at about the same level of security that banks claim. The difference is, of course, that American Express Financial Advisors actually cares whether my money is safe.
Actually the difference is Merrill Lynch.
Mama Merrill cares much more than Amex.
Aren’t we [US] paying like $30B a year interest because of people doing Reagan era savings loans that were insured & now we had to pay that money back & we are paying interest on it, grrrrrr!
Please explain how the FDIC reserve amount differs, in general, from that of a typical private insurer (I wouldn’t be surprised if it’s a little lower than normal, given the losses of the 80’s, but it certainly can’t be 100%). No insurer keeps enough money in reserve to cover all their policies. You may be correct that the existing reserves would not cover a widespread bank failure, but neither would the reserves of a private insurer cover the losses of a major natural disaster. That’s why insurance companies have their own insurers (reinsurers, like Lloyd’s of London) that will cover them in case of extraordinary covered losses.
Effectively, the reinsurer of the FDIC and the FSLIC is the federal gov’t. Your average congresscritter knows that letting a large number of constituents lose their life savings is not the best way to get reelected. Hence the enormous amount of money spent on bailing out the S&Ls a few years back.
Your money market account is only as safe as the portfolio it holds. You can lose principle in a money market, but that would require a large number of defaults on the short term notes the account holds. The risk is pretty low, but it is there. If they were completely risk-free, the accounts would pay pretty much exactly the same as US treasury securities, which are considered the absolute safest–thus lowest paying–fixed income investments in the world.
Rick
Good point about govt. reserves vs. private reserves. I confess I don’t know how much reserve backs up my money market fund, and I’m waaaay too lazy to call up and find out. Nevertheless, I’m dubious about the FDIC.
There are in most cases no reserves backing up a non-bank money market fund. And there have been a few high-profile instances where a money market fund has been in the position of losing money. The reason no money-market fund has “broken the buck” from a standpoint of normal me-and-thee consumers is that in every case so far when one would have had a day-ending NAV of $.99, the fund’s sponsor has made up the loss out of pocket. No one wants to be the first guy responsible for a money market fund breaking a buck.
That said, regulation of money market funds to ensure they are conservative investments is high, essentially all money managers that make money market funds available to the public run their funds more conservatively still, and the result is that a money market fund is almost as safe as a bank deposit of up to $100K and arguably as safe as larger deposits in weaker institutions.