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The FDIC and You: What's Covered?

By Brian O’Connell
On April 10, the Federal Deposit Insurance Corporation (FDIC) stepped in to close down two more banks – Greeley, Colorado-based New Frontier Bank and Wilmington, North Carolina-based Cape Fear Bank.

The two closures represented the 22nd and 23rd U.S. bank failures in 2009, and the 47th and 48th since the recession began in late 2007.

With over 170 more banks on the FDIC’s watch list, bank consumers may wonder if their bank is next and, in the event of a closure, what exactly is covered by the FDIC.

To answer that, visit the FDIC’s “BankFind” web page, which provides a wealth of financial information, including a complete list of U.S. based FDIC-insured banks and their financial history.

As for what’s covered, the FDIC discusses that topic and more.  Under the "Guide to What Is and Is Not Protected by the FDIC," the FDIC says that most bank funds are covered, but not all of them.

For instance, most traditional types of bank accounts like checking, savings, certificates of deposit (CDs), and most IRA accounts are all FDIC-insured. Also covered are money market deposit accounts, including interest earned.  As the FDIC guide attests, “All of these types of accounts are generally insured up to the legal limit of $250,000 and sometimes even more for special kinds of accounts or ownership categories.”

But what bank customer assets do the FDIC leave exposed? Most unprotected funds stem from bank investment products. For example, mutual funds, annuities, life insurance policies, stocks and bonds are not shielded by FDIC insurance. The FDIC also warns that money market mutual funds, unlike money market bank deposit accounts, are not protected.

The FDIC’s criteria for which customer assets are and are not insured depends on the definition of the term "deposit." According to the FDIC web site, "the key point to remember when you contemplate purchasing mutual funds, stocks, bonds or other investment products, whether at a bank or elsewhere is that funds invested are NOT deposits, and are therefore NOT insured by the FDIC or any other agency of the federal government."

Two key consumer banking assets -- U.S. Treasuries and contents of a customer’s bank safe deposit box, can be misunderstood as far as FDIC insurance goes. If you buy a U.S. Treasury bond from a bank, and that bank fails, those bonds are technically not covered by the FDIC. But, even though you bought the bonds at a bank that failed, U.S. Treasuries are backed by the full faith and credit of the U.S. government, thus offering an arguably stronger dose of protection than what the FDIC provides. Do note however that any principal and interest payments that are deposited to your bank account at an FDIC-insured bank are covered up to the $250,000 ceiling.

As for safe deposit boxes, any assets contained within are not covered by the FDIC.  But, that doesn’t mean you’ll lose the contents of your safe deposit box if your bank fails. Either the new bank that acquires the failed one will alert you that the bank is under "new management" or the FDIC will contact you with instructions on how to get your safe deposit box valuables back.

But don’t fret, chances are your bank is perfectly fine and won’t fail, though it’s always a good idea to know what exactly the FDIC does and does not cover.

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