April 2023 | Volume 14, Issue 9

Read the full article from ABC News.

According to the article, the collapse of two regional U.S. banks in three days has some Americans wondering if their bank could be next.

President Biden addressed the nation recently to reassure Americans — "Your deposits will be there when you need them" — and pledging action to "reduce the risks of this happening again."

The federal government took "extraordinary measures" to make sure customers of Silicon Valley Bank and Signature Bank would be made whole and have access to all their money immediately -- whether it was FDIC insured or not.

Biden stressed that these banks were not being bailed out by taxpayers, as was the case during the 2008 financial crisis.

"No losses will be — and this is an important point — no losses will be borne by the taxpayers," he said. Instead, the money will come from the fees that banks pay into the government’s Deposit Insurance Fund.

The good news is that most Americans are covered by the FDIC because most people have less than $250,000 in any one specific bank account.

The FDIC is an independent government agency that was created by the Banking Act of 1933 during the Great Depression to restore trust in the American banking system. Since then, no bank customer has lost insured funds due to a bank failure. The FDIC is funded by premiums paid by banks and savings associations.

The agency will insure up to $250,000, per depositor, in qualified accounts at insured banks. For example, a married couple with a small business may have up to $250,000 insured in an account in one spouse’s name, up to $250,000 in an account in the other spouse’s name and up to $250,000 in a business account. The balance of a joint account can exceed $250,000 and still be fully insured.

Another example: if the same two co-owners jointly own both a $375,000 certificate of deposit (CD) and a $125,000 savings account at the same insured bank, the two accounts would be added together and insured up to $500,000, providing up to $250,000 in insurance coverage for each co-owner.

FDIC insurance coverage includes checking and savings accounts, money market deposit accounts, retirement savings, cashier’s checks, and money orders. FDIC insurance does not cover financial products including stocks and bonds, mutual funds, crypto assets, life insurance policies, annuities, municipal securities, safe deposit boxes or their contents or U.S. Treasury bills, bonds, or notes, which are backed by the full faith and credit of the U.S. government.

Banking experts say one way to boost your FDIC coverage is to "spread the wealth" and open accounts at several banks to hedge risk, particularly if you have more than $250,000 in deposits.

How do you know if your bank is financially fit? Currently, banks with over $250 billion in assets must undergo stringent "stress tests" annually to ensure they have enough cash on hand to weather an emergency, such as a deep recession or a run on the bank. These tests are part of the banking reforms that were implemented to restore confidence in the U.S. banking system after the financial crisis of 2008.

In 2018 under the Trump administration, some of those rules were rolled back, allowing banks with less than $250 billion in assets to be exempt from the tests, including Silicon Valley Bank and Signature Bank. In the wake of those two bank failures, President Biden said he will ask the U.S. Congress and regulators to strengthen the requirements once again for small and mid-sized banks.

Discussion Questions

  1. What is the FDIC?
    The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the U.S. Congress to maintain stability and public confidence in the nation’s financial system. The FDIC insures deposits; examines and supervises financial institutions for safety, soundness, and consumer protection; makes large and complex financial institutions resolvable; and manages receiverships.
  2. What is FDIC deposit insurance?
    FDIC deposit insurance protects bank customers if an FDIC-insured depository institution fails. Bank customers do not need to purchase deposit insurance; instead, it is automatic for any deposit account opened at an FDIC-insured bank. Deposits are insured up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category.

    Deposit insurance is calculated dollar-for-dollar, principal plus any interest accrued or due to the depositor, through the date of default. For example, if a customer had a certificate of deposit (CD) account in their name alone with a principal balance of $195,000 and $3,000 in accrued interest, the full $198,000 would be insured.
  3. As indicated in the article, the federal government has taken "extraordinary measures" to ensure that customers of Silicon Valley Bank and Signature Bank will be made whole and have access to all their money immediately, regardless of whether it was FDIC-insured. In your reasoned opinion, is this an appropriate action by the federal government? More specifically, is it proper to “bail out” depositors who had excess money on deposit at Silicon Valley Bank and Signature Bank that was not FDIC insured? Explain your response.

    This is an opinion question, so student responses may vary. In your author’s opinion, these are difficult questions to answer. From a depositor’s perspective, it would certainly be reassuring for the federal government to “step in” after a bank failure and guarantee all deposits (even those not covered by FDIC insurance). However, would this mean that the federal government can “pick and choose” when to intervene? Would that be fair to those depositors whom the federal government chooses not to “make whole?” Does FDIC insurance ($250,000 per depositor, per FDIC-insured bank, per ownership category) really mean anything if the federal government chooses to “rewrite the rules” regarding FDIC insurance depending on the situation?