 The FDIC change that leaves wealthy bank depositors with less protection |
Source |
American Shipper |
Post Date |
05/06/2024 |
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Affluent Americans may want to double-check how much of their bank deposits are protected by government-backed insurance.
New rules implemented last month capped what the Federal Deposit Insurance Corporation (FDIC) will insure in a trust account at $1.25 million.
Before, there was no limit on trust accounts, which are legal arrangements that ensure an individuals assets are distributed to specific beneficiaries.
The FDIC said the new rule will make it easier for consumers and bankers to understand deposit insurance rules. It is also designed to help FDIC agents more quickly determine which accounts are insured after a bank fails.
For tens of thousands of bank customers, the change could lower how much in those accounts are insured if their financial institution fails. Those affected may need to restructure their deposits or new accounts at another bank to ensure their funds are protected.
"Its somewhat of an obscure change ?and the loss of some insured deposits is something Im not sure the FDIC has highlighted enough," said Ken Tumin, founder of DepositAccounts.com, which is owned by LingTree.
"There may very well be a lot of depositors out there that might not have the insured deposits they had assumed when they originally ed the account."
What isnt changing is that the FDIC still insures up to $250,000 per depositor and per account category at each bank.
Heres how that works: Say you have $250,000 in an individual savings account and $50,000 in an individual checking account at Bank A. That means you, the depositor, have $300,000 total in one type of ownership category (single accounts) at the same bank, so only $250,000 is insured.
If you moved that $50,000 to another bank, it would be fully insured. Similarly, if you put that $50,000 in a joint account ?which is a different ownership category ?the amount would be fully insured even if it stayed at the same bank.
Trust accounts provided a loophole to insure more than $250,000. Under the old FDIC rules, each beneficiary of the trust would get $250,000 in insurance protection. So, for example, if the trust named 10 beneficiaries, then that account would be insured for $2.5 million.
"Before this change, many people werent aware that you could theoretically insure almost an infinite amount at one bank through the FDIC rules through a trust account," Tumin said.
Thats no longer the case. The new rule limits the number of trust beneficiaries that receive the $250,000 insurance amount to five, totaling at most $1.25 million.
Additionally, irrevocable trusts and revocable trusts are now lumped together into one ownership category ?trust accounts ?under the new rules. That new category also includes any deposit account that has named beneficiaries upon the owner? death, such as a certificate of deposit, or CD.
So, the trust that previously was insured for $2.5 million for its 10 beneficiaries is now insured only for $1.25 million.
"As of April, you lose half of that [insurance]," Tumin said.
When the FDIC proposed these rules in 2022 ?a year before talk about lifting the $250,000 insurance cap bubbled up during a run of bank failures ?it estimated that almost 27,000 trust account depositors and just over 36,000 trust accounts "could be directly affected by this aspect of the final rule."
Additionally, merging revocable trusts and irrevocable trusts into one ownership category could decrease coverage "in limited instances."
Still, a small number of irrevocable trusts could see an increase in insurance coverage under the new rules, the FDIC said, while overall most depositors should not see a change in their coverage.
To find out if youre affected, use the FDICs tool ?Electronic Deposit Insurance Estimator ?to figure out on a per-bank basis how much of your money, if any, exceeds the new coverage limits.
If you find that some of your money is now uninsured, talk to your bank. Financial institutions typically work with customers affected by regulatory changes to ensure their large deposits are protected. You may up needing to a different type of account or put the uninsured sum in an account at another bank.
Republic First seizure signals more bank failures to come, expert warns Fears of contagion reignited by first US bank failure of 2024 Republic First Bank, a regional ler based out of Philadelphia, became the first bank failure of 2024 on Friday when it was shut down by Pennsylvanias bank regulator and the Federal Deposit Insurance Corp. (FDIC) seized control of the operation.
The FDIC quickly made a deal for Fulton Bank to buy Republic Firsts assets, but one expert on financial regulatory reform and bank failures says the collapse could be a harbinger of things to come.
"This bank failure indicates that additional failures will occur and will range between smaller community banks and larger banks," said Joseph Lynyak, a banking attorney at Dorsey & Whitney, regarding the seizure of Republic First by U.S. regulators.
Fulton Financial Corp.
"The cause is twofold: higher-cost deposits exceeding the yield on low-yield treasury securities and similar investments held by banks, and the deteriorating commercial real estate market and commercial real estate loans," said Lynyak, who specializes in bank receiverships and failures.
COMMERCIAL REAL ESTATE FORECLOSURES JUMPED 117% IN MARCH AS TROUBLE LOOMS
Regional banks have been struggling to retain deposits as customers seek the safety of larger "too-big-to-fail" rivals, and higher interest rates have diminished the value of their loan books due to increased unrealized losses and lower commercial real estate values.
Investors have worried about a possible contagion in the sector since three prominent lers ?Silicon Valley Bank, First Republic and Signature Bank ?collapsed in early 2023.
Prior to the takeover of Republic First, the last U.S. bank to fail was Iowa-based Citizens Bank in November 2023.
FORMER FDIC HEAD: THERE WILL BE MORE BANK FAILURES
Then in January, New York Community Bank (NYCB) fell under pressure over concerns about its exposure to the beleaguered commercial real estate sector, but NYCB was able to raise $1 billion last month from investors, including former Treasury Secretary Steven Mnuchins Liberty Strategic Capital.
New York Community Bancorp, Inc.
The collapse of Republic First has reignited fears of contagion.
"The FDIC has indicated that banks have potentially significant unrealized losses in their investment portfolios, and many banks will ultimately need additional capital to address these unrecognized losses," Lynyak said.
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