Asset Protection in Uncertain Times Part Two: FDIC Insurance

by | Apr 14, 2023 | 0 comments

The economic news continues to get worse and worse. First, here is a brief summary of some of the advice I offered in last month’s Estate Planning Insights column: Make sure that your savings accounts, checking accounts and certificates of deposit are in FDIC-insured banks or NCUA-insured credit unions. Keep the amount of money at each bank or credit union within the insured limits of $250,000. Money market funds are not insured by the FDIC and could lose their value.

 The FDIC says that no one with money in an account within the insured limit has ever lost money since FDIC began. The FDIC website also says that an insured account is protected by the full faith and credit of the United States. However, that statement is misleading and not backed up by the law. A 1987 opinion by the FDIC’s own counsel states that Congress has a moral obligation to back up FDIC insurance, but that the law does not require the United States to back up the FDIC.

 Also, the FDIC receives no funding from the federal budget. Each FDIC insured bank pays an insurance premium to the FDIC and those premiums are held in the “Deposit Insurance Fund” (“DIF”) to insure against bank failures. All of the premiums accumulated in the DIF are invested in US Treasury securities, which pay interest supplementing the fund. In addition, the Treasury securities in the DIF are backed by the full faith and credit of the United States. However, if many banks fail at one time, it is possible that the DIF investments in Treasury securities, which is the source of funds to pay the FDIC insurance, will not be able to protect all accounts.

The safest interest-bearing investment in the U.S. today is probably Treasury Bills. These investments are backed by the full faith and credit of the U.S. government. There have been a few money market funds which invested 99.5% of their assets in short-term U.S. Treasury securities. The yield has been so low in recent times that many of these funds had difficulty collecting a management fee and still paying interest to investors. Therefore, unfortunately, Vanguard, Fidelity and other financial institutions have, at times, closed these safe money market funds to new investors.

 You can buy Treasury Bills yourself at https://TreasuryDirect.gov. It’s more work than investing in a money market fund, but the yield is a little higher, and it is the safest investment around.

 If you prefer staying with a local bank, and if you want to be safer than just relying on FDIC insurance, then you should check the financial strength of your bank. I like to use a free online rating system. It gives each bank a grade similar to a report card, such as A, B, C, D, etc. If you want to see how your bank is rated, you can look it up online at https://www.depositaccounts.com/banks/health.aspx.

 If your bank has a low rating, you will have to decide whether to pull out your money and make the bank even weaker, or stay put and rely on FDIC insurance in case the bank fails. You can also look online for similar rating systems to check on the financial strength of your credit union or insurance companies. A good financial advisor will be able to take all of these factors into account when designing your investment strategy and portfolio.