Banks and the FDIC Most Americans are familiar with FDIC-insured banks. The Federal Deposit Insurance Corporation is a U.S. government corporation which guarantees the safety of most account types in banks that are members. Currently, accounts are protected up to $250,000 per depositor per bank for CDs, checking, savings, retirement, money market, and a few other account types. Some things that are not guaranteed at your FDIC bank include stocks, safety deposit boxes, stocks, and several others. Believe it or not, FDIC does not insure your money if it gets stolen from the bank! Don't worry though - the bank's private insurance should cover that.
Here is a comforting quote from the FDIC: "Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure."
When Banks Fail The FDIC responds immediately when a bank or institution fails. They usually close the institution right away and sell their deposits and loans to another institution. The customers of the failed institution automatically become members of the buying institution. The largest and most dramatic example of this is when Washington Mutual was closed by the government in 2008. Their assets were sold to JPMorgan Chase & Co because they lacked sufficient liquidity to meet their obligations. All of the customers and their insured accounts remained safe and protected.
Credit Unions and the NCUA Credit unions appear to operate the same as banks from the outside but inside they are a little different. They are actually owned by the members of the credit union, not shareholders like banks are. Therefore, the FDIC does not insure credit unions. Instead, the National Credit Union Administration takes care of that. The NCUA is an independent federal agency that supervises, charters, and insures federal and most state-chartered credit unions around the United States.
Much like the FDIC, the NCUA insures most "share" accounts of member credit unions up to $250,000, at least through 2009. However, if you have multiple accounts they are usually added together to see if you are below the $250,000 limit. Certain retirement accounts are insured separately, also to $250,000. There may be other account types or benefits offered by the credit unions which may not be covered by the NCUA.
When Credit Unions Fail Failure rates among credit unions are low, with maybe a dozen failures per year, and the NCUA maintains a healthy surplus of funding to rescue failed credit unions. However, when one does fail, the NCUA will supervise the sale of the failed institution to a healthy one in much the same way the FDIC handles failed banks. Your accounts are still insured and taken care of through this process.
Investment Accounts and the SIPC Most investment companies in the United States are members of the Securities Investor Protection Corporation. All SIPC accounts are protected up to $500,000 but only $100,000 of that can be in cash. Some companies also purchase additional insurance to give you more protection. If one of these companies fails, your account should be just fine. Keep in mind, though, the SIPC does not cover against market losses.
401k Retirement Accounts If the company that administers your 401k retirement account goes under, will your money be safe? For example, if Fidelity or T. Rowe Price goes bankrupt, what would happen to your money? It depends on what type of insurance they carry. Perhaps it is FDIC, NCUA, or SIPC. Perhaps they carry some sort of private insurance. In most cases, though, there should be plenty of insurance to cover your account in case that company fails. Also, the actual funds for the 401k are usually placed in a trust so that if the company fails, the government will step in and make sure those funds are taken care of properly. Please check with your institution to be sure.
Conclusion In conclusion, as long as your money is kept in a federally-insured account then you should have nothing to worry about. Of course, if any of your accounts are based on the market, such as stocks or mutual funds, they could fluctuate up or down or even go down to zero. But what this article is concerned about is when the financial institution itself fails.
It seems that not a day goes by without more gloom. A bank goes bust or is rescued, an insurance company is swallowed up by another or is nationalised.
It is in times like these that people quite naturally get very worried and want to make sure that they are protected.
Let's look at cash deposit savings.
What are the rules and what protection do you have?
Where should you put your money?
Are Offset Deposit Accounts in mortgages affected and what about Life Assurance Companies and other investments?
What are the rules on deposit accounts?
This area is covered by the Financial services Compensation Scheme (FSCS).
The basic cover for deposits is 100% of the first £50,000 (was £35,000 prior to 7th October 2008). This ceiling is per investor, per banking license holder. So a single joint deposit with a bank is covered for a maximum of £100,000#
However, some banking groups operate several different brands, but have only one banking license. The best example of this is HBOS, as they own Saga, AA, Birmingham Midshires, Intelligent Finance, Halifax and Bank of Scotland.
So any investor should limit their total deposits in these six institutions to £50,000.
Of course, this is further complicated by the proposed merger between Lloyds and HBOS, and it is unclear as yet how this will affect things.
Deposits in non-UK banks operating in the UK are generally covered up to £50,000, but not necessarily all through the FSCS. European Economic Area (EEA) banks can adopt a 'passport' approach, which means that the home country compensation scheme applies first with the FSCS providing a top up, if required.
However, two exceptions apply here.
They could choose to operate on the 'passport' basis only, leaving depositors with only the bank's home country compensation. The big name foreign players do not do this because of the bad publicity it would bring.
Also, the Irish Government increased its compensation scheme limit to €100,000 (about £79,500) on 20 September 2008. So banks like Anglo-Irish and Bank of Ireland offer UK investors a lot more protection than the FSCS. This affects the Post Office, as their accounts are operated by the Bank Of Ireland.
100% protection without any ceiling is available through National Savings & Investments and, for the time being, through Northern Rock.
Offset Mortgages
Many of our clients quite rightly use offset flexible loans as this can save them a lot of money over the years. However, what rules apply here?
There are two possibilities:
A rule called 'set-off' could come into play with the banks. This states that Insolvency Law rules that your net position is calculated - savings would be deducted from your debt.
But this law may not apply to Building Societies. The Building Societies Association have confirmed that the set-off rule would not automatically apply, although individual societies may have it written into their terms and conditions. Even then, this would depend on the administrators.
Life Assurance
For UK authorised life companies, it works like this - the FSCS covers 100% of the first £2,000 of value and 90% after this with no limit.
Offshore Life Companies
They rely on their home company scheme - if any exists. The Isle of Man's scheme is similar to the UK's, whilst Guernsey has no scheme, but insists on 90% of a life company's assets being held by an independent custodian.
UK Investment Bonds Invested in Cash Deposits
Neither the life company nor the investor can look for compensation from the FSCS if the deposit provider goes down, unless there is a guarantee the investor will simply see the value of their bond fall.
On the other hand, if the life company fails, then the FSCS protection would apply. In such an instance the FSCS offers less protection than a direct deposit for sums of up to £38,667, but more cover for investments that are higher than this.
Investments
For FSA authorised investment business, the maximum compensation is 100% of the first £30,000 plus 90% of the next £20,000. This means a total of £48,000 in respect of investments worth £50,000 or more.
The important point to remember is that the FSCS comes into play when an institution fails, not when the investment itself fails.
However, if the failure of an investment leaves a bank or insurance company unable to meet any guarantees it has made, then protection rules do apply.
Rates
Don't forget to make sure you receive a competitive interest rate!
It is important to stress that whilst it is prudent to take all these factors into account, the interest rates you get on each account is crucial. These days you should be able to get in excess of 6% AER.
The Financial Tips Bottom Line
It is worth checking how you would be affected by these rules, and that you won't be affected if a bank fails.
ACTION POINT
For an overview and more detail on all the issues covered here, see - http://tinyurl.com/3ml6ar (note: the increase to £50,000 may not be covered here, depending on if the site has been updated).
Especially, guidance is given here on which brands are owned by who - spend a few minutes of your time to research these links. It could save you a lot of money!
Both Nicholas Swezey & Ray Prince are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Nicholas Swezey has sinced written about articles on various topics from Stock, Investing and Trading and Legal Matters. Nicholas Swezey is the creator of the at HowTheMarketWorks.com.. Nicholas Swezey's top article generates over 3600 views. to your Favourites.
Ray Prince has sinced written about articles on various topics from Finances, Babies and Property Guide. Ray Prince is an Independent Financial Planner with Rutherford Wilkinson plc, and helps UK Resident Doctors and Dentists get the best deals on mortgages, protection and investments, as well as helping them achieve their financial objectives. Just visit. Ray Prince's top article generates over 33100 views. to your Favourites.