The Federal Deposit Insurance Corporation [FDIC] was created in the wake of the Great Depression to help rebuild Americans’ trust in the banking system. Since that time, the FDIC has played a pivotal role in protecting deposits from bank failure. A similar organization, the National Credit Union Administration (NCUA), also exists for insuring credit union deposits and is nearly identical in coverage to the FDIC.
Since the amount was increased during the Great Recession, FDIC insurance covers $250,000 per depositor, per insured bank, for each account ownership category. What exactly does this mean, and how can businesses take advantage of FDIC insurance?
The FDIC insures individual deposits and business deposits against bank failure.
According to the FDIC, “No depositor has ever lost a penny of insured deposits since the FDIC was created in 1933.” This applies to both individual depositors and businesses.
The FDIC protects deposits by charging insured banks a small fee, fractions of a cent on the dollar, and depositing these fees into an insurance fund. In the event of a bank failure, the FDIC uses the assets in this fund to guarantee investors’ savings up to applicable limits. They will then auction the assets and liabilities of the failed bank to recover funds, often with extra financial incentives.
If a resolution cannot be fully met with an auction, the FDIC will reimburse all insured deposits directly from the insurance fund. In the past, there has been a rumor the FDIC takes up to 99 years to make such payouts. However, the FDIC states that it “almost always pays insured depositors within a few business days of a closing, usually the next business day.”
FDIC Coverage Limits
The amount of FDIC protection available at each member bank is limited to $250k per account ownership category – not to be confused with account type. An ownership category could be an individual account, a joint account, or even a business account, while an account type is typically ‘checking’ or ‘savings.’ This means an owner can have multiple types of accounts at each bank, but only $250k would be covered for each ownership category.
FDIC coverage can span many types of deposits, such as checking and savings accounts, money market accounts, certificates of deposit, and more. However, FDIC insurance does not cover investments such as stocks, bonds, mutual funds, life insurance, or annuities.
FDIC insurance treats business accounts the same as personal accounts.
Bank accounts for corporations, partnerships, and unincorporated associations get the full $250k in FDIC coverage, separate from any owner or member of the organization. However, such businesses must be “separately organized under state law and operate primarily for some purpose other than to increase deposit insurance coverage.” In other words, a company cannot be formed solely for the purpose of extending an individual or business’s FDIC coverage.
Is it possible for a business to achieve more than $250k in FDIC coverage?
Yes. A business can extend FDIC insurance by spreading deposits across multiple FDIC insured banks. For example, keeping $400,000 in a single savings account will leave $150,000 uninsured. But, splitting those deposits equally between two banks would result in two accounts with $200,000, both of which would be fully insured.
Organizations with cash reserves significantly exceeding the $250k limit can find it tedious and expensive to manage the number of banking relationships required to achieve full FDIC coverage. Luckily, the advent of financial technology, or fintech, has changed the game for businesses who need FDIC coverage for large sums of cash.
At The American Deposit Management Co. [ADM], we have leveraged this technology to create a concept called Marketplace Banking™. With Marketplace Banking™ businesses can achieve full FDIC protection* for exceptionally large sums of cash, even in excess of $100M. We accomplish this by spreading deposits across our proprietary network of local banks. All businesses need to do is open an American Money Market Account™ [AMMA™] and make a single deposit.
In addition to maximum FDIC protection for business deposits, our fintech provides other benefits. First, our network of banks competes for business deposits, ensuring that businesses receive the most competitive rates available, even in a low interest rate environment. Second, ADM makes reconciliations easy with a consolidated monthly statement and a user-friendly online portal. Finally, AMMA™ is not meant to replace a business’s banking relationship. Rather, it complements it.
With ADM, Businesses Get the MOST Protection, and the MOST Competitive Returns for Cash Reserves
With an American Money Market Account [AMMA™] from ADM, businesses can extend FDIC coverage to all their cash reserves*. In addition, AMMA™ provides the MOST competitive returns available for business cash reserves.
To learn more or get started, contact a member of the ADM team. All it takes is a 10-minute application, and within a few hours you can make your first deposit – then we take it from there. In the meantime, be sure to follow us on LinkedIn, Twitter and Facebook to stay up to date with our valuable market insights and interest rate updates.
*Funds in an AMMA™ can be deposited with traditional banks or Credit Unions. When funds are deposited at a credit union, NCUA insurance will be available in lieu of FDIC insurance and is functionally equivalent.