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When Your Bank Account Balance Runs ABOVE FDIC Insured Limits

David M. Cain
Dec 1, 2008

So far in 2008, 19 federally insured banking institutions closed. As a result, some people are losing confidence in the banking industry, which only exacerbates the problem.

To maintain consumer confidence, the Emergency Stabilization Act that was passed in the fall temporarily raises the limits insured by the Federal Deposit Insurance Corporation. Now, funds held in banking institutions are guaranteed to $250,000 per insurer, per bank. The legislation specifies that basic deposit limits will return to $100,000 after December 31, 2009.

Although the additional $150,000 in insurance coverage has eased the minds of many individuals and business owners, the question remains: What happens when my account balance runs above the FDIC insured limits?

We talked to bankers, the Office of the Comptroller and the FDIC to get the best advice in protecting your accounts.

When Money is Posted

Banks don't have a mandated time of day when memo items become officially posted to the account. "Talk to your banking institution to verify exactly when transactions are posted to your account," says Greg Fahey, director of operations, Canton Region for Chase Bank.

When an Institution is Declared Insolvent

The following agencies supervise the financial health of banks in Ohio: The Ohio Department of Justice, which oversees state chartered banks and credit unions; the Office of Thrift Supervision, which oversees all thrifts; the Office of the Comptroller, which oversees national banks; and the Board of Governors of the Federal Reserve System, which oversees bank holding companies and regulates some state chartered banks.

When one of these agencies declares a bank insolvent, the FDIC typically becomes the receiver of the failed bank. The FDIC runs the national deposit insurance system for banks and savings institutions and is the direct regulator for many small banks in the U.S. In this case, the FDIC is responsible for covering insured deposits and selling a failed bank's assets to help depositors recover a portion of their uninsured funds.

"In most cases, the FDIC finds a buyer for the bank and business continues," says Kevin Mukri, director of press relations, Office of the Comptroller. "When a buyer is found, for the customer it is business as usual - nothing changes right away. There may be a point where the organization appends to new bank standards. If that happens, there will be 15 days notice provided to customers."

For example, if a customer has a savings account that paid 1 percent interest, and is taken over by a bank that has a policy of paying 0.75 percent interest, a notice will be sent to the customer 15 days prior to a change in the interest rate. If the customer does not like the terms, he or she can take that money elsewhere.

"After a takeover, most bank changes occur over time. These changes often have to do with differences between the old and new bank's systems and procedures," says Mukri.

"Typically a bank would close on a Friday and reopen on a Monday," says David Barr, spokesperson, FDIC. "Even though the bank is physically closed during the weekend, customers usually have access to their insured funds by check, debit card or ATM card. Typically, when we find a buyer for the bank, checks will continue to clear and can be used up to the insurance limit - and the same for debit and ATM cards."

When No Buyer is Found

If there's no buyer, then ATM and debit cards will not be active and checks that haven't cleared the system will not clear it, says Barr.

"Those checks will be returned, stamped 'bank closed.' If we can't find a buyer," says Barr, "then typically the bank is closed on a Friday and by Monday morning we are mailing checks to the customers for their insured deposits. We'll also include a final statement so they'll be able to reconcile their checkbooks to see which checks haven't cleared. If they have checks that haven't cleared, they'll have to contact those merchants to make other arrangements."

Depositors have immediate access to the insured portion of their funds, says Barr. To the extent that they have deposits that exceed the insurance limits, they become a creditor of the failed bank's receivership.

"As the FDIC sells the assets of the failed bank, we'll make periodic payments to the creditors. The good news for the uninsured depositors is that they're top tier creditors. The FDIC's insurance fund is also a top-tier creditor because we are actually a creditor for the insured portion of the deposits," Barr says.

As assets are sold, the top-tier creditors have to be fully satisfied before money flows down to other tiers. The amount uninsured depositors receive for their excess funds varies, but Barr has seen it range from 40 cents on the dollar to 100 cents on the dollar. On average it's around 72 cents on the dollar.

Choosing Your Banking Institution Wisely

When choosing your banking institution, make sure you choose wisely. The following are a few things you need to consider:

Look for a financially healthy institution. "Look for an institution that has profitable quarterly reports and is well capitalized," says George Glasser, community bank president, Huntington Bank, Dover, Ohio.

Place money in FDIC-insured accounts. If you need to work with money market and CD accounts, be sure these accounts are SIPC-insured, according to Glasser.

Options for Staying Within Insured Limits

Since your deposits are only currently insured up to $250,000, it's imperative you keep your eye on your balances to stay within the limits. If you have more than the insured limit, you may want to consider the following options:

Diversify into multiple banks. For a larger business with more complicated financials, experts recommend a multi-entity approach to augment FDIC coverage.

Take, for example, XYZ Corp, which has locations in Maple Heights, Parma Heights, Solon, Independence and Vermilion. (Each of these locations is owned by an independent LLC, and all of these LLCs are owned by XYZ Holding, LLC. The holding company owns and manages the real estate on which the businesses are located.)

The FDIC allows $250,000 of protection per entity as long as each entity has a separate business purpose - the entity can't be set up for the sole purpose of augmenting FDIC protection.

In this case, Maple XYZ LLC, Parma XYZ LLC, Solon XYZ LLC, Independence XYZ LLC and Vermillion XYZ LLC could each maintain their own sweep account at the same institution. And each would receive $250,000 worth of FDIC protection for the money running through each entity on a daily basis.

This allows for enhanced protection while still allowing for quick access to liquid assets. To the extent any of these entities exceeds the $250,000 limit, funds could be moved to the holding company on a monthly basis, most likely through the payment of rent by the subs for the use of the buildings.

Obtain extra insurance through DIF. Believe it or not, there is an insurer that backs excess deposit limits that are above the FDIC limits.

The Depositors Insurance Fund (www.difxs.com) began in Massachusetts in the 1930's when state-chartered savings banks and state-chartered cooperative banks were not included in the FDIC.

Over time, the state institutions joined FDIC and the mission of DIF changed to cover any amounts above the FDIC coverage.

The catch? The DIF program covers 68 state-chartered savings banks in Massachusetts only. But many of the participating banks allow out-of-state accounts.

Use the Certificate of Deposit Registry Service (CDARS). When you use the Certificate of Deposit Account Registry Service through your local participating bank, CDARS divides funds into CDs at various banks in the network up to the FDIC insured limits at each institution.

The system ensures that your money is divided among non-related banks, and you can insure your accounts up to $50 million. Visit http://www.cdars.com to find the 60 participating institutions in Ohio.

Look into Wintrust Financial. This bank holding company (http://www.wintrust.com) has 15 separately chartered banks in the Chicago and Milwaukee areas. Wintrust makes its MaxSafe account available to customers of the 15 banks and allows individuals to insure $1.5 million in CD and money market accounts – depending on how the accounts are titled.

Potential clients from outside Chicago and Milwaukee can apply for an account at one of the banks, but Wintrust is understandably cautious in accepting out-of-area clients.

Use IDC Deposits. Just like CDARS divides funds among CDs at different banks, IDC Deposits (http://www.idcdeposits.com) does the same with money market accounts.

Its network consists of more than 250 banks, allowing individuals to have FDIC coverage for up to $5 million through an MMAX account. There are currently no participating banks in Ohio, however one bank each in Indiana and Michigan and seven in Illinois can help divide your money market accounts.

You can also purchase CDs at different banks around the country on your own through brokerage accounts with the click of a mouse. Just be aware that you'll be responsible for making sure your money is divided properly among nonrelated banks.

Watch how you title your accounts. There can be much greater coverage than one account limit of $250,000, depending on how those accounts are titled. Fahey explains that if a husband and wife each have a single account, they each have up to $250,000 of coverage. If they also have a joint account, that account can be insured by the FDIC up to $500,000. So with these three accounts, they could theoretically have up to $1 million in accounts that are FDIC-insured.

Additionally, if the wife has a Payable On Death (POD) account through another individual, that account would also be insured for up to $250,000. Similarly, if the husband has a separate POD account, this account would also be insured up to $250,000. So now the husband and wife could have up to $1.5 million in insured accounts.

Beware, however, that POD accounts have implications on an estate plan - so be sure to check with your financial and legal advisors before creating one.

So, how is an artificial entity such as a corporation or LLC treated in regards to FDIC protection?

For the most part, an entity such as a corporation or an LLC is treated the same as a biological person by the FDIC. The entity is given $250,000 of total protection at any one institution. Like with a person, this is not done on a per account basis, but is based on the total amount of money the entity has at that institution.

For example, if XYZ Corp has $180,000 in a savings account, $20,000 in checking and $60,000 in a CD all at the same bank, XYZ Corp would have $10,000 of unprotected assets. For purposes of FDIC protection "same bank" means common ownership or control. So if XYZ Corp deposits $100,000 at the Lorain branch of LNB, $100,000 at the Avon branch, and another $100,000 in Elyria, the total protection is still only $250,000 total for all deposits with LNB, leaving XYZ Corp. with $50,000 in unprotected assets.

XYZ Corp's $250,000 limit is separate from that of any shareholder who also may have funds at the same institution. Each shareholder will have his or her own $250,000 limit that is unaffected by the amount XYZ Corp has in its account.

The primary difference between an artificial entity and a biological person as far as the FDIC is concerned is that entities cannot participate in "joint accounts" that enhance FDIC coverage. If you and your spouse have a joint savings account, and the account was listed in both your names, your FDIC insurance would combine giving the account $500,000 worth of protection.

So for example, assuming you have no other accounts at that institution, if your spouse deposits $400,000 into the joint account, and you only deposit $5,000, your spouse would still receive $400,000 from the FDIC in the event of bank failure because the account was insured up to $500,000. An artificial entity is not allowed to augment its coverage by having a joint account with another entity or a biological person. The maximum it can receive is $250,000 worth of coverage.

The FDIC website has additional information about how the FDIC insurance works as well as a calculator to determine in the insured amount by inputting various scenarios. Visit http://www.fdic.gov/deposit/deposits for more information.

This article was written in collaboration with Wickens, Herzer, Panza, Cook & Batista Co., Avon, Ohio.

This article was originally published in Facing Today's Economic Challenge Head-On: A Special Report by Rea & Associates, Inc.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

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