PALM BEACH GARDENS, Fla. (MarketWatch) -- The Federal Deposit Insurance Corp. is gearing up for the prospect of a large bank failure. So double-check that all your deposits, including interest, are well within FDIC insurance limits.
The agency seeks comment by April 14 on a proposed rule designed to help it make a quick insurance determination amid an increasingly complex quagmire of FDIC rules and tough-to-figure-out bank accounts.
One section would place a provisional hold on a fraction - say, 10% or so -- of certain account balances at some 159 of the nation's largest banks. The hold could affect some accounts with balances under $100,000.
If you have uninsured deposits at a bank, should you worry? Possibly. Depositors without FDIC coverage lost money in at least two recent failures -- NetBank, Alpharetta, Ga., and Miami Valley Bank, Lakeview, Ohio.
Of $109 million in uninsured deposits at NetBank, nearly 30% has not yet been reimbursed. Of $14 million in uninsured funds at Miami Valley, only 5.9% of uninsured funds, so far, has been reimbursed. All deposits in the most recent failure -- Douglass National Bank, Kansas City, Mo. -- have been reimbursed.
But the tide on FDIC reimbursement of uninsured depositors may have changed in 1991 for the worse. Congress sharply curtailed the FDIC's discretion to extend protection beyond insured deposits. Now the FDIC must enter into the "least costly" transaction when dealing with a troubled bank. So the FDIC won't reimburse uninsured depositors if it means increasing the loss to the deposit insurance fund.
FDIC data indicate that as of Sept. 30, there were 65 institutions with assets of $18.5 billion on its list of "problem" institutions. Barr would not elaborate on their sizes. Nor will the FDIC name the institutions.
So what should you do if you deposit large amounts at a bank?
- Know which deposits are FDIC-insured and which aren't.
- Know the financial strength of your bank.
- Take special care with "sweep" accounts, which move money periodically from one account to another. Determine how FDIC insurance would work with your type of account. The FDIC notes that if funds are swept into a deposit in a foreign branch of the bank, normally those funds are not insured by the FDIC or treated as "deposits" under U.S. law. "A depositor should understand the nature of the sweep transaction, how funds are being changed during the course of the business day and the implications of these changes," Barr says. "Sweep account transactions can have a big impact on a customer's status in the event of failure."
