How Safe Is Your Cash?

At the onset of the Great Depression, a loss of confidence among bank depositors would often lead to bank runs. Because banks only held a fraction of their overall deposits in reserves (with the majority having been lent out), even the slightest rumor of a bank’s potential insolvency became a self-fulfilling prophecy. As a result, many people saw their entire savings wiped out, sometimes overnight. The realization of how unstable the banking industry could become in times of fear and uncertainty eventually gave rise to the Federal Deposit Insurance Corporation (FDIC), which began insuring the deposits of member banks on January 1, 1934. Since the FDIC’s inception, no depositor has lost any insured funds as a result of a member bank failing.

Fast forwarding to the present day, the FDIC insures $250,000 per depositor, per insured bank. This amount has been periodically increased from the initial $2,500 limit that was established in 1934. While this limit seems like a lot, Sigma has come across various client circumstances where deposits exceed this limit, thereby exposing “safe” cash to unnecessary risk in the event that the bank fails (i.e. is taken over by the FDIC). While bank failures are historically uncommon, 140 FDIC insured institutions failed in 2009 (up from just 25 in 2008) and 157 failed in 2010.

Whether it is due to the sale of a house, the maintenance of a business’s operating reserve, a large cash inheritance, or simply a desire to hold large amounts of cash in reserve, having deposits over the federally insured limits can be a crucial (yet easily avoidable) mistake.

There are a number of ways to remain within FDIC insurance limits, even with cash balances over $250,000. Some more common ways of ensuring coverage include the following:

Until December 31, 2012, all non-interest bearing transaction accounts are fully insured, regardless of the account balance. While a non-interest bearing checking account won’t earn you any interest, it can serve as a way to maintain large levels of FDIC insurance.
Overall FDIC insurance at a single institution can be increased by titling various accounts correctly. For example, a husband and wife with a joint account in the amount of $500,000 will be fully insured (each get $250,000 of coverage). This would not be the case if the account were titled in the name of a single spouse.
By using multiple banks, one can obtain large amounts of FDIC coverage. This does not apply to those who hold assets at multiple branches of a single bank. For example, to get $500,000 of coverage on individually titled assets, one would have to place $250,000 in two completely separate banking institutions.

While there are countless aspects of personal finance that are beyond one’s control, it is imperative to be cognizant of those variables that are controllable. Making sure that all bank deposits are federally insured is one thing that is controllable.

If there is the slightest question as to whether or not your deposits are fully insured, a call or visit to your banking institution is well worth the time. Further, the FDIC offers a much more detailed description of their insurance guidelines onlineat

Christopher W. Frayne, CFA, CFP®