Banking

What federal insurance covers on accounts

The government's seizure of IndyMac Bank raises concerns for many consumers about whether their banks might be next.

While it is unlikely the nation will see thousands of banks fail as they did during the savings and loan industry collapse in the late 1980s and early '90s, analysts predict there will be more battered financial institutions that are unable to survive in today's marketplace.

Here are some questions and answers about the government's role when a bank fails and if other banks are at risk:

Q: What happens when the government takes over a bank?

In such a scenario, called a conservatorship, a bank's regulator takes control of the company and oversees their operations. The move is to maximize the value of the institution for a future sale and to maintain banking services in the communities formerly served by the bank.

Q: Is my bank at risk?

John Bovenzi, the former chief operating officer of the FDIC put in charge of IndyMac, reassured consumers late Sunday that bank failures have been rare in the past, and that if more banks do fail, the government has enough in reserve.

“I think the important point to make is that, historically, only a very small percentage of the banks on our problem banks list ever failed,” Bovenzi said on CNN.

According to the FDIC, IndyMac is the fifth U.S. bank or thrift that has failed this year. In 2007, only three financial institutions failed, compared to the 2,808 institutions that failed between 1982 and 1992.

Q: How can I make sure my money is safe?

All deposit accounts worth $100,000 and less are automatically insured by the FDIC. Many retirement accounts, such as IRAs and 401(k)s, are insured to $250,000 per person. But since it's a person's aggregate deposits, and not their individual accounts, that are insured, any amounts over $100,000 deposited at any one bank are not covered. In a joint account, each depositor is insured up to $100,000.

The FDIC doesn't insure money invested in stocks, bonds, mutual funds, life-insurance policies, annuities or municipal securities, even if these investments were bought from an insured bank.

But sometimes deposits sneak north of $100,000 because the customer isn't paying attention. “Regardless of the health of your bank or condition of the overall economy … returns are never high enough to justify the exposure of uninsured deposits,” says Greg McBride, senior financial analyst at Bankrate.com.

The FDIC has information about its insurance on its Web site, at www.fdic.gov/deposit/deposits/insured/yid.pdf.

While keeping more than the limit at any bank means taking a chance, the risks can be bigger with smaller companies if they're heavily exposed to mortgage and other debt during the current downturn.

Q: What do depositors do if they have more than $100,000 they need to put in the bank?

One way to protect the money is to hold accounts under that sum at a few separate banks. For those wanting to keep money at the same institution, perhaps for convenience's sake, a sound strategy is to open different accounts.

Q: Are there any pitfalls to this multiple-account, single-bank approach?

Depositors should make sure their accounts are properly titled at the bank. Bank employees may not always know the correct distinctions. To verify all accounts are FDIC-insured, contact the FDIC consumer hot line at 877-275-3342 or use the deposit insurance calculator at www.fdic.gov.

Q: Should a bank go under, are depositors with more than $100,000 in one account out of luck?

Not entirely. Amounts over $100,000 can be partially reimbursed after some time and hassle, with the money coming from sales of the failed bank's assets. This resembles how creditors are paid in bankruptcies. The schedule varies, according to FDIC dictates.

In IndyMac's case, depositors had access to half of their uninsured deposits Monday via an FDIC advance on asset-sale proceeds. They can withdraw that money, but the FDIC says they don't need to do so. In general, depositors eventually get 70 percent to 80 percent of their funds returned.

Q: How much money does the FDIC have?

The FDIC has nearly $53 billion in insurance funds. Beyond that figure, Bovenzi said the FDIC would have go to other banks to raise more money, adding that in such a case, consumers could expect to see some of among passed on to them in the form of higher fees.

The current estimated loss to the FDIC resulting from IndyMac's failure is between $4 billion and $8 billion.

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