The Federal Deposit Insurance
Corporation (FDIC) is an independent agency of the U.S. government that provides protection against the loss
of insured deposits. On Oct. 3, President
Bush signed the Emergency Economic
Stabilization Act of 2008. This legislation
temporarily increases FDIC deposit insurance from $100,000 to $250,000 per depositor through Dec. 31, 2009.
“Businesses will enjoy the same coverage that individuals enjoy: $250,000 coverage and possibly unlimited non-interest
bearing DDA (demand deposit account)
coverage,” says Susan Lepore, first vice
president of Compliance of MB Financial
Bank in Chicago.
Smart Business spoke with Lepore
about the recent financial crisis, what
changes have been made to FDIC insurance coverage and how these modifications affect businesses.
In what ways has the recent financial crisis
impacted the banking system?
In the liquidity area, there has been
greater competition for deposits, which
has made retail consumer and business
deposits much more expensive. The reason there has been more competition is
that large money center banks that had
other sources of funding have experienced disruption in access to those
sources. As a result they have moved a
higher percentage of their funding to consumer and commercial deposits as
opposed to wholesale funds once more
readily available from institutional
investors.
What specific changes have been made to
the FDIC insurance coverage?
Very early in the crisis the FDIC expanded coverage to $250,000 per depositor and
may cover even more than $250,000 at one
insured bank if you own deposit accounts
in different ownership categories. In mid-October, the FDIC announced a temporary liquidity program that extends unlimited coverage for non-interest bearing
DDAs. The way this works is all banks
were in the program through December 5th. If banks chose to opt out of the program, they had to send notice to the FDIC
by December 5th. If banks did not opt out,
they are in the program through
December 2009, and their customers have
unlimited DDA coverage through that
date. There will be a list maintained, and
banks will have to prominently display
whether or not they are in the program.
This will make it easy for customers to
determine if they have unlimited non-interest bearing DDA insurance coverage
at a particular bank.
What does the expanded FDIC insurance coverage mean for businesses?
The expanded coverage might cause
businesses to rethink how they structure
their bank accounts. In the past, many
companies maintained a certain amount
of balances in a DDA. Balances above a
target level were swept into a customer
repurchase liability account, which was
collateralized — much like a deposit
account that pays interest — by either
investment securities or loans. This
enabled a business to earn interest on
excess balances. With the enhanced DDA coverage and the current very low interest
rate environment, some companies are
keeping much higher balances in their
DDA since they can be fully insured under
the temporary program until Dec. 31,
2009.
Do rules governing the accounts of businesses differ from those of personal accounts?
The most significant difference is that
corporations cannot have deposits in
interest-bearing DDAs. Companies, as
well as consumers, are permitted to hold
interest bearing money market accounts,
although they are limited in the number of
transactions they can have on a monthly
basis.
What strategies should companies who
maintain more than $250,000 on deposit use
to minimize the risk of losing money?
There are three things companies can
do. First, if a business is extremely risk
averse, it can keep all of its balances in a
non-interest bearing DDA at an FDIC
insured institution that is participating in
the Transaction Account Guarantee
Program, which would provide unlimited
FDIC insurance coverage at a participating bank. If the business wants to earn
some interest, it can sweep excess balances over a certain level to a customer
repurchase liability account, which would
be collateralized with either investments
or loans.
Finally, companies can participate in
the Certificate of Deposit Account
Registry System (CDARS) program. This
program allows member banks with certificates of deposit customers to extend
FDIC insurance coverage to as much as
$50 million. Basically, you can put very
large balances in this type of account and
the coverage gets aggregated among several banks, which allows customers to
have much higher FDIC insurance coverage limits. This program is also available
for consumers.
SUSAN LEPORE is the first vice president of Compliance of MB Financial Bank in Chicago. She can be reached at (847) 653-1771 or
[email protected].
