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FDIC Insurance, DIF Insurance, and Your Finances

The following information highlights the various coverages that allows deposits of Bank5 Connect customers to enjoy full deposit insurance, meaning all Bank5 Connect customer deposits are insured in full. Read on to find out how.

The FDIC and Your Finances

What is the FDIC?

The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government that protects you against the loss of your deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government. Since the FDIC’s creation in 1933, no depositor has ever lost one penny of FDIC-insured deposits.

Why Was the FDIC Created?

The FDIC was founded in response to widespread bank failures during The Great Depression in the 1920s and 1930s. President Franklin Roosevelt signed the Banking Act of 1933 to establish the FDIC, regulate the volatile banking industry and renew the American public’s confidence in the banking industry. Two years later, the Banking Act of 1935 solidified the FDIC as a permanent government agency.

Is My Bank FDIC Insured?

If you want to check whether or not your bank is FDIC insured, use Bank Find or call toll-free 1-877-ASK-FDIC. The FDIC insures deposits in most, but not all, banks and savings associations. All FDIC-insured depository institutions must display an official FDIC sign at each teller window or teller station.

Types of eligible accounts

FDIC insurance covers all deposit accounts at insured banks and savings associations, including checking, NOW (Negotiable Order of Withdrawal) accounts, savings accounts, money market deposit accounts, and certificates of deposit (CDs) up to the insurance limit.

The FDIC does not insure the money you invest in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if you purchased these products from an insured bank or savings association.

FDIC insurance limits

If you and your family have $250,000 or less in all of your deposit accounts at the same insured bank or savings association, you do not need to worry about your insurance coverage — your deposits are fully insured. A depositor can have more than $250,000 at one insured bank or savings association and still be fully insured, provided the accounts meet certain requirements. In addition, federal law provides for insurance coverage of up to $250,000 for certain retirement accounts.

The basic FDIC coverage limits are:

  • Single Accounts (owned by one person with no beneficiaries): $250,000 per owner
  • Joint Accounts (two or more people with no beneficiaries): $250,000 per co-owner
  • IRAs and other certain retirement accounts: $250,000 per owner
  • Revocable trust accounts: Each owner is insured up to $250,000 for each unique eligible beneficiary named or identified in the revocable trust, subject to specific limitations and requirements

FDIC funding

Banks are entirely responsible for funding the Federal Deposit Insurance Corporation (FDIC), ensuring that customer deposits remain protected. Bankers recognize the importance of maintaining public confidence in the FDIC and are committed to funding a strong deposit insurance fund.

Banks are solely responsible for all of the FDIC’s expenses. In fact, taxpayers have not borne the cost of covering a single FDIC-insured deposit in the fund’s 80-year history.

Banks paid about $9.7 billion in premiums in 2013. At this rate, banks will provide more than $48 billion in assessments over the next five years, more than 12 times what the FDIC expects in failure costs.

Bank-paid assessments cover all FDIC costs, not just the costs of bank failures. Every cost the FDIC incurs, from supervisory costs such as bank examiners down to the pencils and paper clips used in the offices, are paid for by bank assessments. In 2013, banks covered more than $1.6 million in FDIC administrative and operating expenses.

In addition, if needed, the FDIC has a large line of credit with the Treasury, which must be repaid by industry assessments. Only once in the FDIC’s history did it borrow from this line – in the early 1990s – and that money was paid back, with interest, in less than two years.

 

The DIF and Your Finances

The Depositors’ Insurance Fund (DIF) was established by the Massachusetts legislature in 1934, and at the time the fund was created, it was as an alternative to the FDIC. In fact, Massachusetts savings banks, by state law, were not allowed to join the FDIC.

In 1956, the law was eventually changed to allow Massachusetts savings banks to join the FDIC. For those that did, the DIF became known as an excess deposit insurer, meaning they insured deposits in excess of the FDIC limit. By 1986, all DIF member banks had joined the FDIC, so since then, they've been solely an excess deposit insurer.

The DIF insures all deposits above the FDIC limit in Massachusetts savings banks, and there's no dollar limit to the DIF’s insurance coverage, so they cover everything above the FDIC limit of $250,000.

Today, the DIF has 59 member banks. State law requires that all state chartered savings banks be members of the DIF.

It’s worth noting that even though the DIF was created by state statute, they are a private deposit insurance company and are not backed by the state or federal government.

Types of insured accounts

The DIF coverage is very straightforward. All deposits placed in a Massachusetts chartered savings bank are eligible for DIF coverage. Whether the depositor puts money in a business checking account, an individual savings account, a CD, or a retirement account, it's all eligible for coverage by the DIF.

In addition, even though the DIF is a Massachusetts-based company, there's no residency requirement. In other words, you don’t have to be a resident of Massachusetts to take advantage of DIF insurance. Whether you're a resident of Rhode Island, New Hampshire or any other state, you're eligible for DIF coverage.

The DIF also covers online banks that are based in Massachusetts. If the online bank is a division of a Massachusetts chartered savings bank, the DIF would insure those deposits just as if it was in the regular bank itself.

DIF regulation, oversight, and funding

The Massachusetts Division of Banks oversees the DIF’s operations and financials. In addition, the Division of Banks, just as they do for other state chartered banks, conduct regular examinations. The DIF also has an outside independent auditor who reviews their financial statements.

As far as DIF funding, they charge member banks an annual assessment, which is based on the amount of deposits that are being insured in that bank. In 2013, the DIF took in approximately $2 million of assessment income from member banks.

DIF assets

The DIF currently has $375 million in assets, and the fund is continuing to grow. The DIF has two primary sources of income: the annual assessments on member banks, and income from an investment portfolio.

By state law, the DIF is limited where they can invest their money. They’re not allowed to invest in the stock market; 100 percent of their investments are in U.S. Treasury and other obligations that are backed by the full faith and credit of the U.S. government.

DIF insurance is automatic. Once you place a deposit at a DIF member bank, you're automatically covered for DIF insurance. There's no need to fill out a claims form, applications, or anything like that.

Protecting your money

No depositor has ever lost a cent in a DIF member bank. If a bank should fail, the DIF works very closely with the FDIC -- the priority for both organizations is that depositors get paid as soon as possible. In addition, the DIF works with the FDIC to determine what portion of the deposit is FDIC responsibility and which portion is the DIF's responsibility.

Between 1989 and 1994, 19 DIF member banks failed. It was the worst period in the history of the Massachusetts savings bank industry, far worse than even the Great Depression. But importantly, for those depositors and those 19 banks, they got access to their money the very next business day, both their FDIC insured deposit and their DIF insured deposit.

In those 19 banks, the DIF covered approximately 6,500 depositors holding about $250 million in deposits that the DIF insured. The cost of the fund for insuring these deposits was approximately $50 million. There hasn’t been a bank failure since 1994, so the DIF fund is able to continue to grow.

Depositors in Massachusetts savings banks should take comfort knowing that, through a combination of FDIC and DIF insurance, their deposits are 100 percent protected.

Additional Resources

Official FDIC FAQ

Official DIF FAQ

FDIC on Wikipedia

What Does the FDIC Do?

How the FDIC Works

FDIC History on Investopedia

Timeline: Important Banking Events in the 1930s


The following are two interviews with John D'Alessandro, the vice president of the Depositors' Insurance Fund (DIF), discussing what the Depositors' Insurance Fund is, its history, how it works, how secure it is, and more.

The DIFference With Massachusetts Savings Banks

Katlyn Graham: Hello. I'm Katlyn Graham, here with John D'Alessandro, the vice president of the DIF. Welcome, John.

John D'Alessandro: Thank you, good to be here.

Katlyn: Thanks for joining us. So today, we are talking about the DIF. John, just for people who might be unfamiliar, what is the DIF?

John: The DIF insures all deposits above the FDIC limit in Massachusetts savings banks, and there's no dollar limit to our insurance coverage, so we do cover everything above the FDIC limit in full. I think it might be helpful if I take a minute and provide a brief history of the fund itself. The fund was established by the Massachusetts legislature back in 1934, and at the time the fund was created, it was as an alternative to the FDIC. In fact, Massachusetts savings banks, by state law, were not allowed to join the FDIC. We were at that time what's known as a primary deposit insurer, meaning we insured from dollar one.

In 1956, the law was eventually changed to allow Massachusetts savings banks to join the FDIC. For those that did, we became known as an excess deposit insurer, meaning we insure deposits in excess of the FDIC limit. By 1986, all of our member banks had joined the FDIC, so since then, we've been solely an excess deposit insurer.

Katlyn: Above $250,000?

John: Exactly, exactly. At that time, it was less, but anything, wherever the FDIC limit is, we insure in full. Wherever they might, years past, it was $100,000, and you're right, today it's 250. Wherever it is, we insure above that. That's correct.

We have today 59 member banks. State law requires that all state chartered savings banks be members of the DIF. Like Bank5 and the division Bank5Connect, they are members of the fund, and we would cover their deposits in full above the FDIC limit.

I should point out though, that even though we were created by state statute, we are a private deposit insurance company and we're not backed by the state or federal government.

Katlyn: Oh, that is a good point, so you are a private company.

John: Exactly right.

Katlyn: What types of accounts are fully insured by the DIF? Or above this limit?

John: Sure. The DIF coverage is very straight forward. All deposits placed in a Massachusetts chartered savings bank are eligible for DIF coverage. Whether the depositor puts money in a business checking account, an individual savings account, a CD, a retirement account, it's all eligible for coverage by the DIF.

In addition, even though we're a Massachusetts based company, there's no residency requirement. In other words, you do not have to be a resident of Massachusetts to take advantage of DIF insurance. Whether you're a resident of Rhode Island, New Hampshire or any other state, you're eligible for DIF coverage.

Katlyn: That's a nice feature. You also cover online banks that are based in Massachusetts?

John: Absolutely. If the online bank is a division of a Massachusetts chartered savings bank, we would insure those deposits just as if it was in the regular bank itself.

Katlyn: Is the DIF regulated in any way? Does anyone oversee what you guys do?

John: The Massachusetts Division of Banks, who is our state banks regulator, they do oversee our operations and our financials. In addition, the Division of Banks, just as they do for other state chartered banks like Bank5, they do conduct regular examinations of us. We also have an outside independent auditor who reviews our financial statements.

Katlyn: There is some oversight. How is the DIF funded?

John: Well, we charge our member banks an annual assessment and the assessment is based on the amount of deposits that we're insuring in that bank. Just for example, last year, we took in about $2 million of assessment income from our member banks.

Katlyn: So it's based on how much money each bank has.

John: Exactly right, yeah.

Katlyn: What does the DIF have for assets?

John: We currently have $375 million in assets and the fund is continuing to grow. The DIF has two primary sources of income. First the assessments that I mentioned and second, income from our investment portfolio.

I should mention that by state law, we're limited where we can invest our money. For good reason, we're not allowed to invest in the stock market. However, 100 percent of our investments are in US Treasury and other obligations that are backed by the full faith and credit of the US government.

The point being here is that we're not taking on any credit risk. We just recognize how important it is that these funds are readily available. Should there be a bank closing, we can now pay off depositors.

Katlyn: Right. It sounds like the DIF is very financially secure, $370 million, I would think. Definitely.

Now, to sign up for DIF insurance, do I need to fill out a form at my bank? Or is it automatically applied?

John: It's automatic. Once you place a deposit at one of our member banks, you're automatically covered for DIF insurance. There's no need to fill out a claims form or applications or anything like that.

Katlyn: Great. Well, thank you so much, John, for explaining all this about the DIF, very unique to Massachusetts.

John: Thank you.

 

DIF Ready To Protect Your Dollars

Katlyn Graham: Hello, I'm Katlyn Graham, here with John D'Alessandro, the vice president of the Depositors' Insurance Fund or the DIF. Welcome, John.

John D'Alessandro: Thank you.

Katlyn: Thanks for joining us today. So today, we're talking about the DIF or Depositors' Insurance Fund. John, how financially secure is the DIF?

John: Well, the fund itself is in a very strong position. If I can, your listeners...If they only take away one thing from this podcast, I'd say it should be this: no depositor has ever lost a cent in a DIF member bank. As I mentioned, the fund is in a very sound condition. However, one question I commonly get...We have have $375 million of assets. And the question I get is since we only have $375 million of assets, does that mean we can only cover $375 million of deposits?

The answer is no, we can cover significantly more than that. I can best illustrate this through an example. If one of our member banks fail, and we've determined that the bank has $100 million in excess deposits, deposits that the DIF is insuring, the cost of the fund is significantly less than $100 million. The reason being is that after we pay off depositors, we become a creditor of the failed bank. Even though the bank failed, it still has a number of good assets that have value.

The receiver for the bank, and it's typically the FDIC, will sell the assets and we'll share in the recoveries of that. Typically, the recoveries are around 80 percent, meaning that the loss rate would be about 20 percent. In this example, with $100 million of excess deposits that we're covering, the cost of the fund would be about $20 million dollars because the loss rate's $20 million.

You can see here that the $375 million that we have can go a long way. It can insure much more than just $375 million of deposits.

Katlyn: Definitely. It sounds like definitely able to cover all of your banks and all your depositors. How does the DIF monitor the financial conditions of its member banks?

John: Well, we receive, on a regular basis and at least quarterly, financial statements from our member banks. From that, we will generate a number of financial reports internally that we can use to monitor the financial condition of our banks.

In addition, we meet with officials, both from the FDIC and the Massachusetts Division of Banks to review the condition of the industry. With all this information, we're able to get a pretty good handle on the condition of the banks in general and any particular bank.

Katlyn: You're closely monitoring it, it sounds like.

Now, Bank5Connect is a very financially secure institution.

John: I agree. Bank5 is well run institution, and so is the division Bank5Connect. Just to illustrate this, if you think back to the last economic downturn, 2008-2009, when a number of banks in other parts of the country were experiencing some significant losses, Bank5 remained profitable throughout that period and it remains a profitable institution today.

Katlyn: That says something, for sure. That's a very good point, John, that Bank5Connect is on solid ground and well capitalized.

Now, in these other cases, with other banks, what does the DIF do when banks fail?

John: Well, when a bank fails, we work very closely with the FDIC, and I should emphasize this, that the priority for both organizations is that depositors get paid as soon as possible. In addition, kind of behind the scenes, we'll work with the FDIC to determine what portion of the deposit is FDIC responsibility and which portion is the DIF's responsibility.

Katlyn: Then you make sure that your part, anything that's over 250, that the depositor receives that.

John: Absolutely.

Katlyn: As you said, the depositors have received every dollar.

John: Absolutely. Absolutely. There have been no losses for depositors in DIF member banks.

Katlyn: Do you have any examples of when people have gotten their money back when a bank does go under?

John: Sure. Between 1989 and 1994, 19 DIF member banks failed. I should comment, this was the worst period in the history of the Massachusetts savings bank industry, far worse than even the Great Depression. But importantly, for those depositors and those 19 banks, they got access to their money the very next business day, both their FDIC insured deposit and their DIF insured deposit.

Katlyn: Wow, that must have made a lot of people feel better to get their money and be insured.

How much has the DIF paid out over the years?

John: In those 19 banks, the DIF covered about 6,500 depositors holding about $250 million of deposits that the DIF insured. The cost of the fund for insuring these deposits was about $50 million. We have not had a bank failure since 1994.

Katlyn: Wow. Now, after the economic downturn, is the DIF still prepared to protect depositors today?

John: Absolutely. The DIF is in a very strong condition, and the strength of the fund is enhanced by the condition of the Massachusetts savings bank industry. Our member banks survived the so-called Great Recession remarkably well. The bank has steered clear of certain high risk investments that brought down banks in other parts of the country, the result being that we haven't had a bank failure in 20 years and the fund is able to continue to grow.

Katlyn: That definitely says something that during the Great Recession, all the DIF banks were secure and made it through.

John: Absolutely, so depositors in Massachusetts savings banks should take some comfort knowing that, through a combination of FDIC and DIF insurance, their deposits are 100 percent protected.

Katlyn: Well, thank you so much for joining us today and explaining all this about the DIF and how, in Massachusetts, your money is secure.

 

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Sunday, May 28, 2017