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.