Posts Tagged ‘Deposit Insurance’

FDIC Extends Business Deposit Insurance

Wednesday, April 14th, 2010
FDIC Support Continues

FDIC Support Continues

The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) yesterday approved an interim rule to extend the Transaction Account Guarantee (TAG) program to December 31, 2010 with the discretion to further extend the program to year-end 2011, should economic conditions warrant such action. The program, which was set to expire on June 30, 2010, provides customers of participating depositary institutions full coverage on transaction accounts. The program mitigates the risks that banks would risk unnecessary liquidity failures should businesses diversify their banking deposits among multiple institutions to fall below the deposit insurance cap. Often, as payroll dates or other key payables approach, business banking balances temporarily exceed the account maximum for FDIC-provided deposit insurance. As a consequence of the financial crisis of 2008, small businesses had to consider the possibility of a bank failure occurring at the time of a peak deposit, prompting the FDIC to raise its limits for such business transaction accounts.  The extension of this program is expected to continue a stable funding source for banks to secure low-cost, large, locally-sourced deposits. It will also reassure small businesses that they can maintain their existing banking relationships beyond the June 30 expiry date without fear of the loss of FDIC backing.


FDIC May Extend Coverage of Some Deposits

Monday, July 6th, 2009
Follow This News

Follow This News

According to American Banker, the Federal Deposit Insurance Corp. may extend its blanket coverage for noninterest deposits, currently scheduled to expire at year end. Business customers often keep checking account balances that exceed FDIC coverage limits on insured deposits in order to meet payroll and other large obligations. The FDIC provided this guarantee in the fourth quarter of 2008 as the financial crisis deteriorated. The FDIC is said to be concerned that if it fails to provide assurances that it intends to extend the program, business customers might begin to withdraw funds and split accounts across a number of insured banks, creating some unnecessary uncertainty in the banking and business systems. Small businesses that have accounts exceeding FDIC coverage requirements should watch the FDIC website for developments in this matter to ensure that their deposits remain within coverage limits.

Diversify Your Banking Risks

Friday, May 1st, 2009
Watch Where You Put Your Money

Watch Where You Put Your Money

In Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses (John Wiley & Sons Inc., second edition, 2008), I advised readers about the disaster category of third party failure. This is the risk of failure of the provider of a product or service upon which your small business depends such as, for example,  your Internet service provider or your telephone service. In the context of the banking crisis, a particularly relevant example was presented in the pages of the Wall Street Journal this week.

The Journal reported the story of a depositor who, eight years ago, put her life savings of nearly $600,000 into accounts at Superior Bank of Hinsdale, Illinois. Approximately one month after this deposit was made, the Federal Deposit Insurance Corporation (“FDIC”) seized Superior as a result of allegations over improper financial and accounting practices in its sub-prime business. The FDIC limits deposit insurance to $100,000, with the result that this depositor lost much of her money, as did hundreds of other customers of Superior Bank.

One way to mitigate the risk of third party failure is to diversify your suppliers. Your small business should have, for example, a primary Internet service provider and a secondary, unrelated, Internet service provider which you can use if the primary provider’s service is disrupted. The same is true of your banking services. This depositor would have benefited by making deposits¬† in separate accounts of no more than $100,000 each in at least six different banks. Then, when Superior was seized by the FDIC, she would have had immediate access to the other $500,000 deposits in the other institutions, while she waited for the FDIC insurance to make restitution for the $100,000 she had deposited with Superior.

Of course, since this event occurred, the FDIC raised its insurance limits to reassure depositors of the safety of our banking system during this difficult time. Even so, as a small business owner, if my liquid cash were, let’s say, $50,000, I would not deposit it all in a single bank, even though the entire deposit would be covered by the FDIC. Why? Because I have a business to run and that depends on immediate availability of funds. I cannot have my small business experience even a short period of illiquidity while waiting for a benefit from the FDIC. So I re-assert the advice I had previously given: think redundancy of suppliers. This depositor learned a lesson the hard way; make sure that your small business does not.