What it means
In the United States, deposits at insured banks and savings institutions are covered by the Federal Deposit Insurance Corporation, usually shortened to FDIC, and deposits at federally insured credit unions are covered by a similar agency for credit unions. Many other countries run comparable deposit guarantee schemes.
The aim is to stop depositors from panicking and withdrawing all their money at the first sign of trouble. Coverage is subject to a limit set by law.
The limit applies per depositor, per insured institution and per ownership category, so a person may be covered separately for an individual account, a joint account and certain retirement accounts at the same bank. The limit can be changed by lawmakers, so it should be checked before relying on it.
The institution pays premiums into the insurance fund, and these premiums are a cost of doing business. Deposits above the limit are uninsured, which means that if the bank fails, those amounts are at risk of loss or delay.
This matters a great deal for companies, which often hold balances far above the limit. Not every product at an insured institution is covered.
Shares, bonds, mutual funds and insurance products sold through a bank are typically not deposits, and they can lose value without any deposit insurance protection. Customers should look for a clear statement of what is and is not insured.
For a finance team, the important actions are to know the limit, to understand which accounts are insured, and to spread large cash balances across institutions or use other safe instruments. Some companies use sweep accounts, which move cash between banks automatically to keep each balance within the limit.
Depositors should also remember that insurance protects the deposit, not the institution. A bank can fail and the depositor can still be repaid, though access to the money may be delayed while the regulator sorts out the failure.
In practice
Real-world examples.
Example
A family opens a joint savings account and individual accounts at the same insured bank. Because they fall in different ownership categories, each is protected up to the limit.
Example
A start-up holds $1,000,000 of investor money in a single business account while waiting to spend it. Its CFO spreads the funds across four insured banks so that every balance stays below the coverage limit.
Example
A customer buys a mutual fund through the branch of an insured bank and assumes it is protected. The fund is an investment product, not a deposit, so it is not covered by deposit insurance.
Formula
Calculation
Uninsured amount = Total deposits (in one ownership category) - Coverage limit
Suppose the coverage limit is $250,000 per depositor, per institution, per ownership category. A small company keeps $400,000 in a single business account at one insured bank. The insured amount is $250,000, and the uninsured amount is 400,000 - 250,000 = $150,000.
If the company moves $200,000 to a second insured bank, it has $200,000 at the first and $200,000 at the second. Each balance is below the limit, so the insured amount becomes 200,000 + 200,000 = $400,000, and the uninsured amount falls to 400,000 - 400,000 = $0.Case study
Seen in the real world.
Westbury Landscaping is an illustrative, fictional company with $900,000 in a single operating account at a regional bank. When news of problems at another bank in the region appeared, the owner called his accountant in a panic.
The accountant explained that, assuming a coverage limit of $250,000, the amount at risk was 900,000 - 250,000 = $650,000. She proposed moving $200,000 each to three other insured banks the same day, leaving $300,000 for payroll and bills at the original bank.
The rearrangement meant each balance was close to or below the limit, apart from $50,000 above it at the original bank. In this illustrative story, the owner kept his operations running smoothly and later set up a standing policy that no single bank should hold more than the limit plus a small working buffer.
Watch out
Common mistakes.
- Assuming that all of a business's cash is insured, when the limit applies per depositor, per institution and per category.
- Thinking investment products sold in a branch are covered, when only deposits are insured.
- Believing the insurance protects the bank itself, when it protects depositors up to the limit.
Questions
People also ask.
Who insures bank deposits in the United States?
The Federal Deposit Insurance Corporation insures deposits at banks and savings institutions, and a separate federal agency insures deposits at federally insured credit unions.
How can I find out if my bank is insured?
Insured institutions display an official sign and are listed in the insurer's public database, which can be searched by name.
What happens to deposits above the limit if a bank fails?
They become claims on the failed bank's remaining assets, so depositors may recover part of the amount, but not necessarily all of it, and often only after a delay.
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