Adequate cash reserves are important for business success because they aid in covering everyday expenses, promoting positive relationships with vendors, and funding expansionary projects. However, without proper insurance, business cash could be inaccessible or even lost in the event of a bank failure.
When deciding how to keep cash safe, businesses have options. Two of the safest places to invest cash are banks and credit unions. Both types of institutions provide some government protection for your funds. However, to determine if credit unions are as safe as banks, we must first understand how they protect your business cash.
Deposit Protection for Banks – FDIC Insurance
In the decade surrounding the Great Depression, about 9,000 banks failed. In response to this crisis, Congress established the Federal Deposit Insurance Corporation [FDIC] in 1933. The newly established agency was tasked with protecting the deposits of American consumers and businesses.
The FDIC originally covered only $2,500 per depositor at each bank. Since that time, the limit has increased tenfold to its current level of $250,000.
When a member bank fails, the FDIC steps in to protect depositors. The agency does this in two ways – by facilitating the transfer of deposits to a solvent bank or reimbursing covered deposits from its own reserves. They also monitor all member banks and help ensure they remain solvent.
With FDIC insurance, a business can rest assured their cash reserves are safe up to the limit. This insurance is backed by the full faith and credit of the United States’ government and according to their website, no depositor has ever lost a penny of FDIC insured funds.
NCUA Insurance – Deposit Protection for Credit Unions
A credit union is a not-for-profit financial institution owned by its members. Whereas banks have existed for thousands of years, credit unions are a newer concept. In fact, the first credit union in the United States – St. Mary’s Cooperative Credit Association – was formed in 1909.
By the time the Great Depression occurred, credit unions were in their infancy. Still, Congress recognized the need to regulate these financial institutions.
Credit unions have been overseen by several different agencies in the past century. In brief, the history of credit union regulation includes:
- 1934 – The Federal Credit Union Division was established as a part of the Farm Credit Administration to oversee credit unions.
- 1942 – The Federal Credit Union Division was transferred to the FDIC.
- 1948 – The Federal Credit Union Division was renamed the Bureau of Federal Credit Unions and moved under the Federal Security Agency.
- 1953 – The Bureau of Federal Credit Unions was moved to the Department of Health, Education and Welfare.
- 1970 – The National Credit Union Administration [NCUA] was established as an independent agency.
Throughout much of their history, credit union deposits were not protected by government insurance. As credit unions became more popular, Congress established the National Credit Union Share Insurance Fund [NCUSIF] along with the NCUA in 1970. This fund is similar to the Deposit Insurance Fund administered by the FDIC. With the creation of the NCUSIF, credit union depositors gained government protection.
Since the NCUA was established, its authority and autonomy have grown. Some of the major changes that have occurred in the last few decades include:
- 1970 – The NCUSIF was formed and the NCUA began to insure deposits up to $20,000.
- 1974 – NCUA deposit insurance coverage was increased to $40,000.
- 1979 – NCUA deposit insurance coverage was further increased to $100,000, making it equal to FDIC coverage at the time. Congress also created the Central Liquidity Facility – similar to the Federal Reserve’s Discount Window – which acts as a lender of last resort for struggling credit unions.
- 1982 – Congress granted the NCUA emergency merger and temporary conservatorship authority – similar to the abilities of the FDIC during a bank collapse.
- 1984 – The NCUSIF was restructured to provide better protection in times of crisis.
- 2009 – The NCUA deposit insurance limit was raised to $250,000 following the Great Recession.
Today, the NCUA operates with similar authority to the FDIC. This includes the responsibility to insure deposits, protect the owners of credit unions, intervene during a collapse, charter federal credit unions, and regulate credit union activities. Like the FDIC, the NCUA is backed by the full faith and credit of the United States’ government, so your funds are safe – up to the limit of coverage.
Which is safer – a bank or a credit union?
For business depositors, FDIC and NCUA insurance are functionally identical. They have the same limits, same government backing, and the same unblemished track record. These factors mean that banks and credit unions offer equivalent protection for business deposits.
On the other hand, a business that invests more than $250,000 with one bank or credit union is still subject to risk. Since the FDIC and NCUA only protect deposits up to this limit, funds above the limit could be lost if the institution holding them fails. Fortunately, modern financial technology – commonly shortened to fintech – now provides businesses with a simple solution.
Extended FDIC / NCUA Insurance with Marketplace Banking™ by ADM
Our company, the American Deposit Management Co. [ADM], uses proprietary fintech to provide access to extended FDIC / NCUA insurance. We call this concept Marketplace Banking™ and it works by spreading business cash across our nationwide network of banks and credit unions that compete for deposits.
In addition to extended safety, Marketplace Banking™ allows companies to access nationally competitive deposit rates and a liquidity plan to match their needs. We accomplish all of this with one account and one consolidated monthly statement.
To learn more and get started, contact us today.