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Posted: June 16, 2009

Is your deposit covered?

FDIC insurance and local community banks

Michele Falivene

The economic meltdown has resulted in a few positive side effects, including a paradigm shift among consumers that will prove to be positive for our nation.

As consumers began to act on their lack of confidence in the marketplace last October, they took on less debt, learned to better mitigate their risk, paid cash for purchases and increased their savings.

Americans now have more cash in their bank accounts, in fact, the U.S. savings rate, near zero less than a year ago, has soared to nearly 5 percent of income, on average. And, much of this money is going straight into people’s bank accounts, rather than into long-term investment instruments, allowing consumers to maintain comfortable levels of liquidity.

In this environment, consumers are eager to ensure their money is protected. Understanding the latest changes in FDIC insurance will help depositors do just that. Last October, the FDIC increased deposit insurance from $100,000 to $250,000 through December 2009. In recent weeks, the FDIC further extended this increase to the end of 2013. Not only is the extension significant, so is the manner in which account holders can maximize their FDIC protection on now even larger deposits.

This protection gives a lot of relief to those who have large deposits – even into the millions of dollars – and should bring peace of mind to customers at local community banks.

Those not familiar with the benefits of community banks often have a misperception about these banks’ ability to insure larger deposits. Many community banks can easily handle large deposits and are a good option for consumers who want to protect their assets a little closer to home. 

With more than 8,000 community banks across the U.S., the FDIC sees community banks as a vital player in the nation’s economy and has stepped up to ensure that community bank assets continue to be well protected. With FDIC insurance, it’s important for depositors to know how they can properly insure their accounts, so don’t hesitate to ask bankers to review your account structure and explain how FDIC insurance applies.

Community banks that are members of CDARS®, the Certificate of Deposit Account Registry Service® give their customers access to FDIC insurance for deposits up to $50 million. Nearly 3,000 financial institutions across the country offer CDARS service and more than 50 Colorado banks offer CDARS.

CDARS allows depositors to combine the convenience of working with their preferred local banking institution with the security of full FDIC insurance.

How does CDARS work? When an account holder deposits a significant amount with a CDARS network member, that institution uses CDARS to place the funds into certificates of deposit issued by network banks. Network banks issue these CDs in increments of less than the FDIC insurance maximum to ensure that both principal and interest are covered by full FDIC insurance.

With the help of a sophisticated matching system, network members exchange funds on a dollar-for-dollar basis, so that the equivalent of the depositor’s original investment comes back to their institution and effectively stays local. This also means that the full amount can support lending initiatives that build a stronger local community.

Let’s say a depositor has $2,500,000 to deposit in a CD, at an interest rate that matches the client’s investment goals. The customer’s bank will first maximize the coverage within their own bank by using various ownerships within the family including  mini-trusts, and then if needed, the customer’s bank works with member banks to split the remaining deposit into multiple accounts. The CD accounts will carry the same rate; clients can rely on full FDIC coverage and continue to work with their banker who does all the work behind the scenes. Clients see one seamless solution where there are no hidden fees and clients receive one monthly statement.

CDARS allows a customer to maintain their relationship with their personal banker, who knows their client, their client’s goals and accounts.

Yet another benefit of securing funds through a community bank applies to IRAs. When clients hear that their mutual funds and investments are insured – they need to read the fine print to understand what they are insured against – because these terms often only protect against theft.

It’s important to remember that, with FDIC insurance, if a bank fails, for any reason you are insured up to the maximum limits. This includes bank-issued IRAs. However if an IRA or mutual fund fails, your assets are not similarly protected. 

The FDIC is investing in America’s community banks, and banks must return the favor. Fees that banks incur for FDIC insurance have increased significantly, but good community banks continue to bring this full-faith protection  to customers at no expense. For First American State Bank, and many other Colorado Banks, it’s an investment well worth making for our customers’ peace of mind.

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Michele Falivene is senior vice president of First American State Bank in Greenwood Village.

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