George Sutton: FDIC has a perfect record of protecting insured bank deposits

Federal agency is there to prevent bank runs, not avoid claims.

(Aaron Wojack | The New York Times) A window decal on March 14, 2023, at the San Francisco headquarters of First Republic Bank notifies depositors that they are insured by the Federal Deposit Insurance Corporation. Under current law, the government insures bank deposits only up to $250,000.

There are several ways to protect your bank deposits, regardless of whether you are an individual or a business and regardless of what happens to your bank.

The Federal Deposit Insurance Corporation, which was first created in the early 1930s at the low point of the Great Depression, has a perfect record of paying insured depositors. It is a government agency whose primary concern is preventing panics, not avoiding claims or forcing depositors to wait for their money.

If you have more than $250,000 in your bank or credit union, you can multiply coverage by putting the money into different kinds of accounts. Checking and savings accounts are each insured to $250,000, even if one person owns both. So are joint accounts, CDs, trust accounts and payable-on-death accounts. Spread your money into four different kinds of accounts and you are covered up to $1 million.

Let your bank or credit union help you divide up a large deposit into separate insured accounts. They want to help you so you don’t take some or all of your money elsewhere.

Another option can be used for business payroll accounts and trust accounts holding money for many beneficiaries. If properly designated an omnibus account with pass-through coverage, each of the beneficial owners of the money is separately insured. In other words, each employee owed money held in a payroll account is separately insured, regardless of how many employees are involved.

Another important point is that the FDIC has another role in a failed bank besides insurer. It is always the receiver of the failed bank and responsible for liquidating its assets. The laws regarding bank liquidations have unique provisions that give depositors first claim on the proceeds of the liquidation regardless of their insured status. They must get paid in full before general creditors and shareholders can collect anything.

Regulators have the authority to place a bank into receivership simply by giving notice and do that before a bank can sink into deep insolvency. So even uninsured depositors will collect most of their deposits as the bank’s loans and securities are collected or sold. To speed up this process, the FDIC often pays uninsured depositors their estimated share of the liquidation right away as an advance against their claims.

Only government securities offer greater protection to depositors. Compare this to the bankruptcy of an unregulated and uninsured “crypto bank” such as Celsius Networks and FTX. Customers that deposited crypto tokens in those companies have had no access to their accounts since they were frozen and will likely lose most or all of their deposits. More importantly, depositors in a crypto bank have no priority to the proceeds from selling assets. Some can collect nothing until investors are made whole. And they will have to wait possibly years before they will collect anything.

The whole point of deposit insurance is to remove all risk to depositors and stop runs. It has proven how well that works over a period of more than 80 years and has earned the public’s trust.

George Sutton

George Sutton was Utah’s commissioner of financial institutions from 1987 to 1992 and a banking attorney until he retired in 2021.