Banks have been a hot topic this quarter. There has been negative news about bank failures, but also positive news like high rates available on CDs and savings accounts. We have received questions from clients about the safety of cash deposits in the last couple of weeks, so we wanted to go over the basics on deposit insurance.

FDIC:

As an independent agency of the US government, the FDIC protects the cash that has been deposited at FDIC insured banks if that bank fails. This deposit insurance is backed by the full faith and credit of the United States government.

You do not need to apply for FDIC insurance. You automatically have it when you deposit cash into an FDIC insured bank. Most banks are FDIC insured, but if you aren’t sure, you can check the status of your bank here: https://banks.data.fdic.gov/bankfind-suite/bankfind.

Deposits are covered up to $250,000 per depositor per FDIC-insured bank. For example, if Sally has $300,000 at Bank A and $150,000 at Bank B, she has a total of $450,000 in cash, but only $400,000 of it is FDIC insured. However, if Sally’s account at Bank A is held jointly with her husband Steve, then they are each covered for $250,000 at Bank A making the entire $300,000 insured.

It is our recommendation that clients care careful not to hold more than what would be covered by FDIC insurance at any bank in the unlikely event that that bank failed. It is relatively easy and low cost to spread cash out amongst banks to ensure all deposits are covered.

Along with checking and savings accounts many Certificates of Deposit (CDs) are also FDIC insured. Purchasing a CD at a different bank than where your deposits are held is one way to earn additional interest while ensuring you are fully covered by FDIC insurance. We can purchase CDs for clients within their Schwab accounts from many different banks. This gives us flexibility to find attractive rates from reputable banks while also making sure we stay under FDIC limits.

SIPC

Securities Investor Protection Corporation (SIPC) sometimes gets lumped together with FDIC, but they are different. SIPC helps protect investors in the event their brokerage firm fails financially or if customer assets go missing. SIPC extends $500,000 in coverage of securities and cash per investor with a limit of $250,000 on cash. SIPC does not protect investors from the value of their investments declining and they do not investigate fraud or securities crimes.

Asset Protection at Schwab

Client accounts at Schwab are protected by both FDIC and SIPC. Typically, cash is held in a “Bank Sweep” account on a client’s behalf. In some cases, Schwab will split the cash sweep account across multiple different banks enabling FDIC coverage above the “per bank” limits. Schwab accounts are also protected by SIPC. This coverage would be used to reimburse clients in the event that the brokerage failed and there was a shortfall of assets during liquidation.

Any securities owned by a client belong to the client, and the SEC does not allow Schwab to use client assets to finance any part of their business. These securities are segregated from Schwab’s other assets and held by a third-party depository institution. These securities would not be available to creditors in the very unlikely event that Schwab became insolvent.

Lastly, Schwab also has additional insurance known as “excess SIPC”. This program has a $600 million aggregate that covers a short fall in SIPC coverage in the event that Schwab’s brokerage business fails.