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What is the Federal Deposit Insurance Corporation, and how does it work?

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The Federal Deposit Insurance Corporation (FDIC) is an American governmental agency. The FDIC provides insurance coverage against bank failure for depositors in U.S. depository institutions.

U.S. depository institutions are subject to regulation by federal and state banking authorities. They are defined under the Code of Federal Regulations section 542.320 as any entity (including branches of U.S banks located in foreign territories) organized under U.S. laws or a bank branch of a foreign entity if the branch is in the United States.

What exactly is FDIC coverage?

FDIC is automatic insurance coverage against loss due to bank failure for FDIC-insured deposits up to a certain limit of $250,000 per each account category type. FDIC insurance is backed by the full faith and credit of the U.S. government.

There is no insurance application for account holders. Depositors only need to look for a notification or a sign that says the bank branch is a “Member FDIC.” If unsure, you can search the FDIC database online using FDIC BankFind. Bank5 is a Member of FDIC.

Does FDIC insurance cover every penny you have in a bank account?

No. FDIC insurance only covers up to $250,000 per depositor, per bank, according to the rules for each account ownership category. The insurance covers the principal amount deposited and any accrued interest (calculated to the default date) up to $250,000.

Here are some examples of coverage limits at an FDIC-insured bank:

  • An individual account at a bank is covered up to $250,000. 
  • The same individual may have another account at a different bank, which is also covered up to $250,000.
  • An individual who opens more than one account at one bank, even at different branches of that same bank, is limited to $250,000 in total for any individual account at that bank.
  • A joint account has coverage up to $250,000 per co-owner.
  • The limits for revocable trust accounts are $250,000 per owner per unique beneficiary. For three beneficiaries, each would have a limit of $250,000 for a total of $750,000.
  • A husband and wife may have separate individual accounts plus a joint account. This structure would provide up to a $250,000 limit for each individual account plus $250,000 for each co-owner of the joint account for a total of $1,000,000.
  • See the detailed descriptions of other account types to understand more about FDIC insurance coverage.

Massachusetts Depositors Insurance Fund

With certain banks, such as Bank5, you can have 100% of your funds covered by deposit insurance. The Massachusetts Depositors Insurance Fund (DIF) is a private insurance program that provides coverage for any funds deposited at Massachusetts savings institutions that exceed the FDIC limits. 

At Bank5, through the combination of FDIC insurance and DIF insurance, every penny of your deposits at the bank is covered by insurance against bank failure.

What about financial products?

Neither the FDIC nor DIF insurance covers any risk of loss from investments in financial products.

The financial products that are not insured include annuities, bonds, life insurance policies, mutual funds, and stocks. If any financial institution offers these products, disclosure documents must clearly state that these financial products are NOT FDIC-insured against the risk of loss.

Does FDIC or DIF insurance cover losses from theft or fraud?

No. The only coverage offered by the FDIC and DIF insurance covers loss due to bank failure. You should seek additional private insurance for your deposits if you wish to have them insured for fraud, such as identity theft.

If an unauthorized party gains access to your bank account and conducts transactions without your consent, the FDIC and DIF insurance does not cover this risk.

What does it mean for a bank to fail?

A bank failure may come from bankruptcy, insolvency, or systemic collapse. It may happen from a liquidity crisis when too many depositors try to withdraw funds simultaneously. This scenario is called a “run on the bank.”

A run on a bank occurs when a large number of customers withdraw their deposits at the same time due to concerns about the bank’s solvency. This crisis is a self-fulfilling prophecy, as the sudden withdrawals of large amounts of capital can quickly lead to the bank’s insolvency.

Economic downturns and reports of financial difficulties usually trigger runs on banks. This fear can cause customers to worry that their deposits are not safe and lead them to withdraw their funds. Banks are also vulnerable to runs during political and social unrest, as customers may feel their savings are more secure elsewhere.

During a run on a bank, customers can line up to withdraw their deposits as quickly as possible. As each customer withdraws their funds, the bank’s resources decrease, leading to an increasingly difficult situation. To stem the flow of withdrawals, the bank may limit how much an individual can withdraw in a given day.

When a run on a bank occurs, the government may step in to assist. This assistance may come in a deposit insurance scheme, where the government guarantees to back up customer deposits to a certain amount. This protection reassures customers that their deposits are safe and can help the bank’s operations.

It is important to note that a run on a bank does not necessarily mean that the bank is insolvent. A bank can survive a run if it can access support from the government or other lenders. However, a run can signal deeper issues within a financial institution, and customers should be aware of potential risks when dealing with a bank.

After The Great Depression, the FDIC started on June 16, 1933, to increase consumer confidence in the U.S. banking system. In the rare event of a bank failure in modern times, the FDIC staff takes over the bank’s operations. 

Insured depositors receive a check or an account at a solvent bank. Their funds are made available to the account owners subject to the FDIC limits for account types. This process usually happens within two business days.

Account owners with funds on deposit that exceed the FDIC limits receive a prorated share of any monies available after the sale of all the bank’s assets and payment of secured creditors. This process may take months or years for a final settlement.

If an FDIC-insured account had excess funds covered by the Massachusetts DIF, the additional loss would be paid to the account owners by the DIF. This payment happens on a timely basis.

Contact customer service for additional questions about the FDIC and DIF insurance for Bank5 accounts.

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