Expanded coverage Featured

7:00pm EDT November 25, 2008

The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the U.S. government that provides protection against the loss of insured deposits. On Oct. 3, President Bush signed the Emergency Economic Stabilization Act of 2008. This legislation temporarily increases FDIC deposit insurance from $100,000 to $250,000 per depositor through Dec. 31, 2009.

“Businesses will enjoy the same coverage that individuals enjoy: $250,000 coverage and possibly unlimited non-interest bearing DDA (demand deposit account) coverage,” says Susan Lepore, first vice president of Compliance of MB Financial Bank in Chicago.

Smart Business spoke with Lepore about the recent financial crisis, what changes have been made to FDIC insurance coverage and how these modifications affect businesses.

In what ways has the recent financial crisis impacted the banking system?

In the liquidity area, there has been greater competition for deposits, which has made retail consumer and business deposits much more expensive. The reason there has been more competition is that large money center banks that had other sources of funding have experienced disruption in access to those sources. As a result they have moved a higher percentage of their funding to consumer and commercial deposits as opposed to wholesale funds once more readily available from institutional investors.

What specific changes have been made to the FDIC insurance coverage?

Very early in the crisis the FDIC expanded coverage to $250,000 per depositor and may cover even more than $250,000 at one insured bank if you own deposit accounts in different ownership categories. In mid-October, the FDIC announced a temporary liquidity program that extends unlimited coverage for non-interest bearing DDAs. The way this works is all banks were in the program through December 5th. If banks chose to opt out of the program, they had to send notice to the FDIC by December 5th. If banks did not opt out, they are in the program through December 2009, and their customers have unlimited DDA coverage through that date. There will be a list maintained, and banks will have to prominently display whether or not they are in the program. This will make it easy for customers to determine if they have unlimited non-interest bearing DDA insurance coverage at a particular bank.

What does the expanded FDIC insurance coverage mean for businesses?

The expanded coverage might cause businesses to rethink how they structure their bank accounts. In the past, many companies maintained a certain amount of balances in a DDA. Balances above a target level were swept into a customer repurchase liability account, which was collateralized — much like a deposit account that pays interest — by either investment securities or loans. This enabled a business to earn interest on excess balances. With the enhanced DDA coverage and the current very low interest rate environment, some companies are keeping much higher balances in their DDA since they can be fully insured under the temporary program until Dec. 31, 2009.

Do rules governing the accounts of businesses differ from those of personal accounts?

The most significant difference is that corporations cannot have deposits in interest-bearing DDAs. Companies, as well as consumers, are permitted to hold interest bearing money market accounts, although they are limited in the number of transactions they can have on a monthly basis.

What strategies should companies who maintain more than $250,000 on deposit use to minimize the risk of losing money?

There are three things companies can do. First, if a business is extremely risk averse, it can keep all of its balances in a non-interest bearing DDA at an FDIC insured institution that is participating in the Transaction Account Guarantee Program, which would provide unlimited FDIC insurance coverage at a participating bank. If the business wants to earn some interest, it can sweep excess balances over a certain level to a customer repurchase liability account, which would be collateralized with either investments or loans.

Finally, companies can participate in the Certificate of Deposit Account Registry System (CDARS) program. This program allows member banks with certificates of deposit customers to extend FDIC insurance coverage to as much as $50 million. Basically, you can put very large balances in this type of account and the coverage gets aggregated among several banks, which allows customers to have much higher FDIC insurance coverage limits. This program is also available for consumers.

SUSAN LEPORE is the first vice president of Compliance of MB Financial Bank in Chicago. She can be reached at (847) 653-1771 or slepore@mbfinancial.com.