When choosing an investment for business cash, FDIC insurance is a vital protection that shouldn’t be ignored. It protects your funds from bank failure and provides peace of mind that your cash is backed by the full faith and credit of the United States government – up to the applicable limit.
Unlike most types of insurance, FDIC coverage doesn’t require you to contact an insurance broker or pay monthly premiums. Instead, banks foot the bill on your behalf.
An Overview of FDIC Insurance and The Deposit Insurance Fund
The FDIC is an independent federal agency tasked with protecting people and businesses against losses resulting from the failure of a member bank that holds their deposits. The agency has two methods for protecting the deposits of a failed bank – facilitating the transfer of funds to a solvent one or reimbursing deposits from the Deposit Insurance Fund [DIF].
The DIF is the pool of money the FDIC maintains to fulfill its obligations in the case of a bank failure. The FDIC has two avenues for collecting the funds in the DIF: assessments and interest.
How Assessments Are Used to Fund the FDIC
Most of the funds in the DIF come from quarterly assessments that the FDIC charges participating banks. The amount that each bank pays is determined by the assessment rate multiplied by the assessment base.
The assessment rate has been based on risk since 1993 – with riskier banks paying higher rates. After overhauls to the calculation in 2011 for large banks and 2016 for small banks, the risk assessment is now based on a scorecard that categorizes banks based on financial performance and potential losses if the bank were to fail.
The assessment base is calculated based on the size of the bank. Until 2010, the assessment base was roughly equivalent to total domestic deposits at a given bank. Then, the Dodd-Frank Wall Street Reform and Consumer Protection Act changed the way the assessment base is calculated. It is now the average consolidated total assets minus tangible equity – meaning that banks now pay assessments on liabilities as well as insured deposits.1
In short, the amount a bank contributes to the DIF is relative to the cost the FDIC would incur if the bank failed. Because of this structure, banks can reduce the amount of their assessments by making responsible financial decisions that promote the safety of deposits – furthering the FDIC’s mission to protect the American banking system.
How Interest on Securities Is Used to Fund the FDIC
In addition to assessments, the FDIC collects interest on securities in the DIF. This interest adds a relatively small amount to the DIF compared to assessments. In fact, assessment income was $3.1 billion while net investment income was only $0.8 billion in the fourth quarter of 2023.
The FDI Act specifies certain requirements for securities in the DIF to ensure it is managed responsibly. First, the DIF must be invested in securities that are issued or guaranteed by the United States government. These securities must be bought and sold exclusively through the Treasury’s Bureau of the Fiscal Service’s Government Account Series program. Additionally, the Secretary of the Treasury must approve all investments over $100,000.
The investment restrictions placed on the DIF help ensure that the fund is not compromised by swings in investment markets. Further, the securities in the DIF are always listed as Available for Sale – meaning the reported value reflects unrealized losses. This classification ensures that American businesses have a clear understanding of the value of the DIF and, therefore, the ability of the FDIC to protect their deposits.
Businesses Get FDIC Insurance with No Premiums
Since the DIF is funded by assessments and interest, businesses do not need to purchase FDIC insurance. Instead, it is automatic when a business invests with a participating bank and chooses a covered type of account.
Checking, Savings, Money Market, and CD accounts are covered up to $250,000 per ownership category at each insured bank. Unfortunately, the $250,000 limit is not enough for most businesses.
To gain additional coverage, a company could invest with multiple FDIC insured banks to take advantage of the combined insurance of various banks. However, this process is time consuming and difficult to manage. Fortunately, there is a simpler solution – professional deposit management.
Gain Access to Extended FDIC Insurance with ADM
At the American Deposit Management Co. [ADM], our deposit management solutions provide access to extended government protection for business cash – above and beyond the $250,000 limit. We accomplish this by spreading funds across our nationwide network of financial institutions that compete for deposits. This allows your business to take advantage of the combined insurance from multiple banks or credit unions and ensure all your cash is safe.
In addition to extended safety, our solutions make it simple to access nationally competitive returns and liquidity to match your needs. With ADM, your company can achieve access to the safety, liquidity, and returns you seek with a single account and consolidated monthly statement.
To learn more and get started, contact us today.
1A history of risk-based premiums at the FDIC. FDIC. (2020, January). https://www.fdic.gov/analysis/cfr/staff-studies/2020-01.pdf
*American Deposit Management Co. is not an FDIC/NCUA-insured institution. FDIC/NCUA deposit coverage only protects against the failure of an FDIC/NCUA-insured depository institution.