[The first installment in an ongoing series detailing strategies that investors can use to insulate themselves and their finances from the ongoing credit crisis.]
By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report
With evidence mounting by the day that the banking industry may be in deeper than it admits, many investors are wondering what the Federal Deposit Insurance Corp. (FDIC) actually does and how it will protect them.
This question becomes even more crucial now that, under the proposed banking-sector rescue legislation that was passed by the Senate Wednesday night, the individual cap on the level of government-guaranteed deposits would be raised from the current $100,000 to the new level of $250,000.
Let's take a look at what the FDIC is and does, and outline how it's supposed to function. There are also two steps folks can take to ensure the safety of their deposits.
The 4-1-1 on the FDIC
The FDIC is an independent government agency formed by Glass-Steagall Act of 1933, as a response to the runs on banks that took place during the Great Depression.
In 2005, the Federal Deposit Insurance Reform Act increased the amount of insurance coverage for an Individual Retirement Account (IRA).
Ostensibly, federal deposit insurance was created to protect depositors from the loss of deposits at FDIC-insured banks and savings associations. And the good news is that the FDIC has done so remarkably well over the last 75 years, that no depositor has lost a single penny of insured deposited assets.
FDIC insurance covers checking accounts, savings accounts, money market deposit accounts and certificates of deposit.
It does not, however, cover so-called "non-deposit products," such as stocks, bonds, mutual funds or life insurance, even though many of those products are offered through FDIC-insured banks.
As you might suspect, there are limits as to what is insured at any given institution. In general, deposit insurance covers:
- Single accounts owned by a single owner: $100,000
- Joint accounts with two or more owners: $100,000 per owner
- Revocable trusts: $100,000 per owner per qualifying beneficiary subject to specific limitations (check with your tax advisor or accountant)
- IRAs and select retirement accounts: $250,000
It's important to note that the FDIC individual limit applies separately to different banks. That means if you have $100,000 in each of two separate accounts at different banks - one at each bank - you're actually insured for the full $200,000.
Credit Crisis Safety Plays
As we mentioned, under the proposed banking-sector rescue legislation that was passed by the Senate Wednesday night, and which is supposed to head to the House of Representatives for a review and possible vote sometime today (Friday), the individual cap on the level of government-guaranteed deposits would be raised from the current $100,000 to the new level of $250,000. But that new coverage will not take effect until the bill passes the House and is then signed into law by U.S. President George W. Bush.
Until that happens, there are still a couple of "action items" worth pursuing to protect and help yourself. They are:
- Call your bank and make sure it's FDIC-insured. If it isn't, consider switching to a bank that is.
- If you're unsure about your own assets, and whether or not they are covered, check out the FDIC's electronic insurance estimator.
But do it sooner rather than later. There are a record 117 banks on the FDIC's troubled list and our own estimates suggest that at present rates we could easily see that number rising to more than 200 in the next six months. That means the agency could be dumping dollars in the near term, so it's only logical to make sure your money is covered.
[Editor's Note: "Credit Crisis Safety Plays" is a new Money Morning series that will detail strategies that investors can use to insulate themselves and their finances from the ongoing credit crisis. These personal finance missives will draw upon the experiences of such experts as Money Morning Investment Director Keith Fitz-Gerald. Next up: How to be sure that your bank is safe.]
News and Related Story Links:
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Money Morning:
Bailout Bill Clears the Senate, Heads for (Another) House Vote. -
Wikipedia:
Federal Deposit Insurance Corp.
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FDIC Website:
FDIC's electronic insurance estimator
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Wikipedia:
The Great Depression. -
Money Morning Market Commentary:
Since You Asked ... Here's How I Would've Fixed the Fiasco.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.