FDIC Sheds Qualifying Beneficary Coverage Rule

The FDIC is going to make two changes to their coverage. One affects beneficiaries and one affects trust accounts, according to a bank insider who participated in teleconference call the FDIC held banks this morning as a refresher course on FDIC coverage. The big news is that the “qualifying beneficiary” rule is gone. Here’s the specifics:

BENEFICIARIES
It used to be, only beneficiaries that were direct family members qualified for the $100k FDIC coverage. Now, any beneficiary will receive full FDIC insurance coverage.

TRUSTS
Our insider says, “Before, if a trust allocated assets to beneficiaries in unequal amounts, FDIC coverage was basically gimped. If there were 5 beneficiaries and 1 got 80% of assets and the rest were split between the other 4, FDIC coverage would not equal 500k

Now, regardless of allocation, FDIC will give 100k coverage to each beneficiary up to 5 beneficiaries. At 6 or more, if the allocation is not equal between all beneficiaries, it reverts to the old rules for amounts over 500k. If the allocation is the same, each beneficiary (to infinity) gets 100k coverage per grantor on the trust.”

So, good news, there’s more lenient FDIC coverage. A small measure designed to help stem the number of depositors, concerned about FDIC coverage, from yanking their accounts, These changes should be reflected on the FDIC website by Monday, said our source.

(Photo: andrewcarroll)

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  1. Brontide says:

    This is probably in order to reduce the flight of capital from shaky banks. WaMu had 16B of deposits leave the bank in the last 2 weeks in order to keep the accounts under FDIC coverage levels.

    • mugsywwiii says:

      @snowmoon:
      No, they had $16B of deposits leave the bank in the last 2 weeks mostly because people were needlessly afraid that their money wasn’t secure despite FDIC coverage. The sheeple got scared, and they brought down a bank that otherwise might have survived.

  2. humphrmi says:

    For better or worse, the government is doing all it can to stem the tide of panic that is gripping the financial sector.

    I’m sure this is based on some research that showed that recently failed banks lost beneficiary and trust accounts because of the old rules… financial managers will move quickly if their fiduciary responsibility becomes threatened.

  3. Ein2015 says:

    If the government wanted to prevent people from moving their checking/savings/etc accounts from risky banks, shouldn’t it just insure EVERYTHING in those accounts?

    It’s seems like banks are going to ALWAYS lose the $100k+ accounts if they admit they’re having problems with the FDIC the way it is now.

    What would the negatives be? I know the FDIC has limited monies, but if the USFG can offer to chuck $700,000,000,000 at bailouts/buyouts/whatever, can’t it offer to chuck that over to people who put life savings in a bank when that bank dies?

    What does everybody think about that?

    • NightSteel says:

      @Ein2015: Because the government cannot possibly insure every dollar in every account everywhere. They can’t even keep up with the current bank failures. The cap exists so that everyone has a better chance of getting at least some money, instead of a few million-dollar depositors sucking up all the federal dollars and leaving nothing for the rest of us.

    • Mr.Compliance says:

      @Ein2015:

      With Wamu, the FDIC has found another bank to take over the deposits of the failed institution. When that occurs, FDIC insurance does not matter. All deposits, reagrdless of their value are assumed by the receiving institution.

      Its only when the FDIC cannot find another institution to take over the banking operations, like with IndyMac, will FDIC coverage limits apply.

      That being said, read the FDIC brouchure so you understand how coverage applies and don’t keep more than $100,000 in one bank. http://www.fdic.gov

      What sucks is those that held WaMu stocks and bonds. They just got royally screwed.

  4. KaliaKaplode says:

    There’s a trade-off here:

    Less deposit insurance = More careful monitoring of the bank by customers. However, this also leads to vulnerability to bank runs.

    More deposit insurance = Protection against bank runs, but you’ve eliminated depositors incentive to carefully select and monitor a bank (aka it introduces moral hazard into depositors action, they don’t bear losses if the bank fails).

    • Ben Popken says:

      @KaliaKaplode: That’s the most specious argument I’ve heard all week – and I watched the debates last night.

    • mugsywwiii says:

      @KaliaKaplode:
      A bank’s obligation to their shareholders is profitability. A bank’s obligation to their customers is good service. A deposit account customer doesn’t need to care about a bank’s financial condition any more than they need to care about a retail store’s financial condition.

  5. trashbaby says:

    I really wish people would stop saying “don’t keep more than 100k in a bank” …there are so many ways to set up accounts for coverage. For example, say there’s a family of four. Husband, wife, and two kids. They have a joint savings with mom and dad as account holders and kids as beneficiaries = 400k fdic coverage. Then each parent opens an individual account, naming the spouse beneficiary = 100k coverage x2. Then, the parents have their joint checking account = 200k coverage. Then each parent has an IRA =250k coverage x2 and custodian (UTMA) savings for the kids = 200k coverage. that’s 1.5 million in coverage for a family of four.

  6. KaliaKaplode says:

    A bank’s first obligation to it’s customers it to earn a return on their money. The worst possible return, is for the bank to lose it all.

    Depositor’s have the strongest incentive of anyone to monitor the bank. They are the one in the position to lose money if it all goes down.

    Deposit insurance limits bank runs, but it reduces the incentive for someone to monitor the bank. This is why we have a third-party regulator (the Fed) to step in a monitor banks. It’s a trade-off.

    Deposit insurance is limited to the first 100k, so that big depositors will still have an incentive to monitor the bank.

    Not sure what is “specious” about this.

    • mugsywwiii says:

      @KaliaKaplode:
      The depositors earn whatever interest they are promised regardless of the financial condition of the bank and what the bank is able to earn.

      Depositors are NOT the ones in the position to lose money if it all goes down, shareholders are.

      I don’t think you understand what you are talking about at all.

  7. orlo says:

    MA gives unlimited insurance of accounts at MA chartered banks. Prices are high, so I find it’s good to keep a quarter of mil. just in checking. Since the state has a $1.5B deficit it might even be necessary to give some money to arrange the next bailout, this time for state governments. Luckily you can buy politicians for less than the cost of a mediocre suit.

  8. KaliaKaplode says:

    Depositors are in that position because of deposit insurance (and the government’s implicit guarantee that big banks are too big too fail). Still, despite this you don’t think depositor’s at Wamu were concerned about potential losses? Over $16B of non-FDIC insured deposits fled from Wamu before the Fed and JP Morgan stepped in.

  9. KaliaKaplode says:

    From the Concise Encyclopedia of Economics: : “Opponents of deposit insurance argued, based in part on the experience of the state funds, that insurance would weaken the incentive for depositors to care whether their banks and S&Ls took excessive risks. Because the rates for deposit insurance were the same for the stodgy low-risk lender as they were for the high-flying, risk-taking lender, the low-risk banks and S&Ls would end up subsidizing the high-risk ones. As the S&L crisis and the bank crisis of the eighties and early nineties show, they were right. Over time the insurance-induced weakening of depositor discipline over banks caused a mostly unnoticed weakening of the financial condition of individual banks.”

    http://www.econlib.org/library/Enc1/DepositInsurance.html