In today’s changing financial environment,
it is very important that business owners
know how Federal Deposit Insurance
Corporation (FDIC) insurance works, particularly in light of two recent changes.
“The changes made to FDIC coverage are
important, as they provide stability to the U.S.
banking system,” says Wendy Bolas, a business banking manager with FirstMerit Bank.
“Today, customers are concerned with capital preservation and maintaining uninterrupted access to their working capital.”
Smart Business spoke with Bolas about
the changes in FDIC insurance, how they
work to protect customers and common misconceptions about FDIC coverage.
What are the changes in FDIC coverage?
The first change is increased coverage, per
person, per account. The coverage increased
from the $100,000 to $250,000 for money
held within an FDIC insured institution.
Customers should understand they are not
necessary limited to $250,000 in coverage.
For personal accounts, the coverage can be
multiplied by different ownership categories. For example, an individual can be
insured on a single account as well as a joint
account as well as selected trust ownership
categories. Dividing your funds into different
accounts is a great way to increase coverage
for you and your family.
The second change is more important to
businesses and corporations. This change is
referred to as the Temporary Liquidity
Guarantee Program (TLGP) and it provides
full coverage for non-interest bearing transaction accounts regardless of the dollar
amount. That means that business and corporate checking accounts are insured separately from business savings, money markets and CDs.
Under the previous law, if a business
owner had $100,000 in a money market and
$300,000 in their checking account, their
total coverage would have been capped out
at $250,000, but with the new rule the
money market is insured up to $250,000 and
the checking account is completely insured.
Why were such changes put in place?
In the weeks leading up to these changes,
there was a great deal of concern regarding the stability of financial institutions. Many
customers were moving money around to
different financial institutions to ensure they
were receiving as much coverage as possible.
Increasing the insurance cap from $100,000
to $250,000 dramatically reduced the need to
move money to multiple institutions.
The purpose of the TLGP change was to
ensure that businesses could be sure that
funds for vendor payments, payroll, etc.,
were guaranteed to be available. This program increased confidence in the payment
systems between financial institutions, thus
increasing stability.
Are these changes permanent?
The changes mentioned are in effect until
December 31, 2009. At that time, the government will evaluate the state of financial institutions and customers’ trust in such institutions to determine if these changes should be
extended or changed.
This time limit was put in place due to a
concern about the effect these changes
would have on the overall reserves of the
insurance fund. By placing a time limit on
these changes, the FDIC has allowed for the
opportunity to reevaluate and make changes
if necessary at the end of 2009. Many reports
have stated that the chairman of the FDIC believes that the $250,000 limit will remain in
place moving forward for consumers. The
need to extend the TLGP will depend on the
perception of the strength of financial institutions at year end.
How are banking consumers affected?
Customers who are aware of these changes
can consult with their bankers to maximize
their FDIC insurance coverage or earnings
potential depending on their individual situations. In the case of business owners, the best
way to maximize insurance coverage is to
increase the percentage of deposits into their
checking account as these deposits are completely covered under the TLGP.
Are there drawbacks to these new policies?
Yes, these changes have increased the
amount of potential claims against the FDIC
insurance fund which has resulted in an
increase in insurance premiums for member
banks. As for- profit businesses, all banks will
be looking to reduce other expenses, pass
the costs along to their customers, or some
combination of both. Customers may see a
direct charge that is identified as an FDIC fee,
an increase in general fees to offset costs or
financial institutions lowering interest paid to
offset the FDIC premium.
Are there any misconceptions consumers
currently have about FDIC policies?
How customers can increase or maximize
coverage based on different ownership categories is confusing. It is important to have
conversations with trusted financial advisers
to ensure you are receiving the appropriate
coverage for your individual situation. It is
important that you think about insurance
coverage within the context of the overall
goals of your business. Your financial institution should offer a complete product set that
will fit the needs of your business and your
financial institution should have a strong balance sheet, available capital, and a track
record of solid financial performance.
WENDY BOLAS is a business banking manager with FirstMerit Bank. Reach her at (330) 996-8061 or [email protected].
