Are you a small saver? Do you, like I, have certificates of deposit (CDs) in banks?
Even though CD interest rates are at historic lows, barely higher than 0%, many of us maintain them because of the U.S. government’s guarantee, via the FDIC, of our deposits’ safety.
FDIC is the Federal Deposit Insurance Corporation — a U.S. federal government corporation that operates as an independent agency created by the Glass–Steagall Act of 1933. It provides insurance guaranteeing the safety of deposits in member banks, up to $250,000 per depositor per bank as of January 2012. In practical terms, what this means that if you have a C.D. in a bank that goes bankrupt, the FDIC will recover and return to you the amount of your deposit up to a limit of $250,000.
As of November 18, 2010, the deposits in 7,723 U.S. banking institutions are insured by the FDIC. The FDIC also examines and supervises certain financial institutions for safety and soundness, performs certain consumer-protection functions, and manages banks in receiverships (failed banks). The FDIC receives no Congressional appropriations but is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. The FDIC does not provide deposit insurance for credit unions, which are insured by the National Credit Union Administration (NCUA).
Indeed, on the masthead of the FDIC website is this guarantee:
Each depositor insured to at least $250,000 per insured bank
But there is a very alarming rumor being pedaled on the Internet that come January 1, 2013, the FDIC will end its 100% coverage of all insured deposits!
Below is a YouTube video conveying the rumor, made by a man who calls himself “Pastor Dowell”:
The video itself is based on an article on PoorRichardsBlog with the frightening title, “US Bank Run Imminent as FDIC Expanded Deposit Insurance Ends Dec. 31st.” The article asserts:
As of January 2013 the FDIC stops offering 100% coverage for all insured deposits. That amounts to $1.6 trillion in deposits, 85-90% deposited with the TBTF mega banks. Once the insurance ramps back to $250,000 the FDIC risk amelioration offered to large depositors will cause them to flee from the insecurity of the much reduced FDIC coverage. This money will rotate immediately into short term Treasury securities. The treasury, in order to handle this flood of money, will immediately offer negative interest rates. This financing will resemble the .5% negative interest rate offered by the Swiss and Germans on the funds flooding to their banks from Spain, Greece and Italy. This will be a bank run much larger than the Euro banks flight to safety.
Before you start hyperventilating, you should know THIS IS NOT TRUE!!!!!!!
On January 1, 2013, the FDIC will not end 100% coverage for “all insured deposits,” (which would include certificates of deposit or CDs since CDs are FDIC “insured deposits”).
Rather, on January 1, 2013, the FDIC will no longer cover all noninterest-bearing transaction accounts.
Here’s what the FDIC page, “Temporary Unlimited Coverage for Noninterest-bearing Transaction Accounts,” says:
From December 31, 2010 through December 31, 2012, all noninterest-bearing transaction accounts are fully insured, regardless of the account balance and the ownership capacity of the funds. This coverage is available to all depositors, including consumers, businesses, and government entities. The unlimited coverage is separate from, and in addition to, the insurance coverage provided for a depositor’s other accounts held at an FDIC-insured bank.
So what’s a “noninterest-bearing transaction account”?
As described by the FDIC, a noninterest-bearing transaction account is a deposit account where:
- interest is neither accrued nor paid;
- depositors are permitted to make an unlimited number of transfers and withdrawals; and
- the bank does not reserve the right to require advance notice of an intended withdrawal.
In other words, a noninterest-bearing transaction account (NIBTA) is not a certificate of deposit (CD)! Unlike an NIBTA, a CD is a deposit account where:
- interest is accrued or paid;
- depositors are NOT permitted to make an unlimited number of transfers and withdrawals. Instead, the depositor must pay a penalty if s/he withdraws or liquidates the C.D. before its maturity.
In other words, the rumor that on January 1, 2013, the FDIC will end its 100% coverage of “all insured deposits” is NOT TRUE. Don’t get sucked into the fear mongering.
To remove all doubt, the following is from the FDIC website on what is insured and what is not insured:
FDIC-Insured
- Checking Accounts (including money market deposit accounts)
- Savings Accounts (including passbook accounts)
- Certificates of Deposit
Not FDIC-Insured
- Investments in mutual funds (stock, bond or money market mutual funds), whether purchased from a bank, brokerage or dealer
- Annuities (underwritten by insurance companies, but sold at some banks)
- Stocks, bonds, Treasury securities or other investment products, whether purchased through a bank or a broker/dealer
For More Information from the FDIC
Call toll-free at 1-877-ASK-FDIC (1-877-275-3342) from 8 a.m. until 8 p.m. Eastern Time, Monday through Friday.
See also my post of Oct. 23, 2011, debunking another case of fear-mongering: “Is it true banks won’t let you withdraw cash?“
~Eowyn
