Is That Deposit Insured or Not?

ABA Banking Journal, August 1990 | Go to article overview

Is That Deposit Insured or Not?


Concerns over federal deposit insurance play on two stages.

There is the broad picture being studied and debated in Washington, as the Treasury Department and other agencies work toward a January 1991 due date for a special report to Congress. And then there is the workaday level of deciding how much coverage a depositor is entitled to should a bank or thrift fail.

As complex as the first stage is and will be, the second presents its own challenges. That's because the statutory deposit insurance limit of 100,000 can be expanded for a depositor depending on the various "rights and capacities" in which he or she holds deposits at one institution. (Deposits held at other institutions, of course, are separately insured.)

New twists. There are always questions about coverage from confused consumers, but bankers are likely to be receiving a flurry of them starting in August.

This will be in the wake of the notice all insured banks and thrifts were required to send to depositors by July 29 regarding changes in coverage resulting from FDIC's new rules. (FDIC announced no action would be taken against banks making a good-faith effort between July 29 and Sept. 1.) FDIC developed and finalized the new rules-most of which were effective July 29-for several reasons. (Time deposits opened before July 29 are subject to the old rules until the first maturity date after July 29.)

Among them was the requirement in the Financial Institutions Reform, Recovery and Enforcement Act that the rules governing coverage of institutions falling under the Bank Insurance Fund (the original FDIC) and SAIF (the new insurance fund that replaced the Federal Savings and Loan Insurance Corp.) be brought into conformance with each other. In several cases the FSLIC rules were more liberal than the FDIC rules.

Additionally, the agency was taking the opportunity to codify numerous rulings and interpretations issued by its Washington, D.C., legal staff since the rules were last completely revised in 1967.

The following questions and answers are based on FDIC documents and an interview with Roger A. Hood, assistant general counsel at FDIC.

Q. How extensively have the rules changed for bank customers?

A. Not drastically. "Most of the basic principles are the same," says Hood. "It's not as if we scrapped the whole [Federal Deposit Insurance] Act and the philosophy behind it."

Q. Will many depositors be affected by these changes?

No. In some ways, debating the maximum deposit insurance coverage available for hundreds of thousands of dollars of deposits held by a consumer in various legal rights and capacities is an exercise in mental gymnastics. Many people are fully covered because they don't have $100,000, period, or because their funds are spread among different institutions in fully insured pieces.

Even if they aren't, as the system is currently set up, the insurance limits only become an issue if the institution cannot be sold. Then the failure must be handled as a payoff, subject to deposit insurance limits.

Q. What happens if a payoff is necessary?

A. FDIC aggregates all deposit accounts held at a bank by a depositor. In this regard, the depositor may be more than one person in the eyes of the insurance rules. Each "person" the depositor is depends on the various rights and capacities in which he or she holds deposits in at the bank or thrift.

For many customers, the most relevant coverages are 100,000 as an individual and $100,000 as a joint accountholder. If the person has an individual retirement account at the same institution, he has another 100,000 of coverage. In a new development, he also could qualify for $100,000 of coverage for a Keogh account at the same institution. (The latter is a case where FDIC decided to adopt an FSLIC practice.) There are other rights and capacities, such as accounts held by an insured depository as a fiduciary, that can qualify an owner for still further insurance. …

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