In today’s changing financial environment, it is very important that business owners know how Federal Deposit Insurance Corporation (FDIC) insurance works, particularly in light of two recent changes.
“The changes made to FDIC coverage are important, as they provide stability to the U.S. banking system,” says Jim Bandeen, vice president of business banking, FirstMerit Bank. “Today, customers are concerned with capital preservation and maintaining uninterrupted access to their working capital.”
Smart Business spoke with Bandeen about the changes in FDIC insurance, how they work to protect customers and common misconceptions about FDIC coverage.
What are the changes in FDIC coverage?
The first change is increased coverage, per person, per account. The coverage increased from the $100,000 to $250,000 for money held within an FDIC insured institution. Customers should understand they are not necessary limited to $250,000 in coverage. For personal accounts, the coverage can be multiplied by different ownership categories. For example, an individual can be insured on a single account as well as a joint account as well as selected trust ownership categories. Dividing your funds into different accounts is a great way to increase coverage for you and your family.
The second change is more important to businesses and corporations. This change is referred to as the Temporary Liquidity Guarantee Program (TLGP) and it provides full coverage for non-interest bearing transaction accounts regardless of the dollar amount. That means that business and corporate checking accounts are insured separately from business savings, money markets and CDs.
Under the previous law, if a business owner had $100,000 in a money market and $300,000 in their checking account, their total coverage would have been capped out at $250,000, but with the new rule the money market is insured up to $250,000 and the checking account is completely insured.
Why were such changes put in place?
In the weeks leading up to these changes, there was a great deal of concern regarding the stability of financial institutions. Many customers were moving money around to different financial institutions to ensure they were receiving as much coverage as possible. Increasing the insurance cap from $100,000 to $250,000 dramatically reduced the need to move money to multiple institutions.
The purpose of the TLGP change was to ensure that businesses could be sure that funds for vendor payments, payroll, etc., were guaranteed to be available. This program increased confidence in the payment systems between financial institutions, thus increasing stability.
Are these changes permanent?
The changes mentioned are in effect until December 31, 2009. At that time, the government will evaluate the state of financial institutions and customers’ trust in such institutions to determine if these changes should be extended or changed.
This time limit was put in place due to a concern about the effect these changes would have on the overall reserves of the insurance fund. By placing a time limit on these changes, the FDIC has allowed for the opportunity to reevaluate and make changes if necessary at the end of 2009. Many reports have stated that the chairman of the FDIC believes that the $250,000 limit will remain in place moving forward for consumers. The need to extend the TLGP will depend on the perception of the strength of financial institutions at year end.
How are banking consumers affected?
Customers who are aware of these changes can consult with their bankers to maximize their FDIC insurance coverage or earnings potential depending on their individual situations. In the case of business owners, the best way to maximize insurance coverage is to increase the percentage of deposits into their checking account as these deposits are completely covered under the TLGP.
Are there drawbacks to these new polices?
Yes, these changes have increased the amount of potential claims against the FDIC insurance fund which has resulted in an increase in insurance premiums for member banks. As for- profit businesses, all banks will be looking to reduce other expenses, pass the costs along to their customers, or some combination of both. Customers may see a direct charge that is identified as an FDIC fee, an increase in general fees to offset costs or financial institutions lowering interest paid to offset the FDIC premium.
Are there any misconceptions consumers currently have about FDIC policies?
How customers can increase or maximize coverage based on different ownership categories is confusing. It is important to have conversations with trusted financial advisers to ensure you are receiving the appropriate coverage for your individual situation. It is important that you think about insurance coverage within the context of the overall goals of your business. Your financial institution should offer a complete product set that will fit the needs of your business and your financial institution should have a strong balance sheet, available capital, and a track record of solid financial performance.
JIM BANDEEN is a vice president of business banking with FirstMerit Bank. Reach him at email@example.com or (614) 718-5558 x227.