Tony Cutler

Tony Cutler: The banking system works because banks act as an intermediary between depositors and borrowers.

Heightened concerns surrounding the recent take over of Indymac Bank by the Federal Depositor Insurance Corporation (FDIC) has registered speculation in the minds of many bank account holders across the nation in regards to the safety of their deposits. The chief concern among customers is the likelihood that their monies will be lost to poor performing and insolvent banks.

While most people are aware of the FDIC and the $100,000 insurance policy protecting their money, they may not fully understand the complex nature of protecting their funds from complete loss. In light of these recent events, understanding the process of the FDIC and what happens in bank failure should ease the minds of weary depositors. It is important to understand how you can best protect yourself from loss and ensure that your savings are covered by the FDIC.

Your Money Isn't In the Vault…
Banks take in your deposits and pay interest to you; they then lend those funds to others charging an interest rate. This spread between what a depositor receives and what a borrower pays accounts for the majority of a banks income. However, if someone fails to pay back that loan, it decreases the funds available to pay you on demand.

The banking system works because banks act as an intermediary between depositors and borrowers. As a depositor, your risk exposure to a defaulting borrower is spread out over the total number of depositors at a bank. If you deposit $10,000 and someone fails to repay a $10,000 loan, you do not loose your deposit.

However, if the bank experiences a large number of loan defaults, the bank can become insolvent and therefore create a situation where they are unable to cover the demands (withdrawals) of depositors. This was the case with IndyMac and the take over by the FDIC of that institution.

When things go bad...
The FDIC steps in and takes receivership (control) of a member bank when it is determined that the bank can no longer meet the demands of the depositors. In the case of IndyMac, it is estimated that a $1.3 billion run occurred on the institution over an 11 day period. This means an average of over $100 million in cash was being withdrawn each day as a result of consumer fears of insolvency on the part of the bank.

When the FDIC takes control of the bank, it backs deposits using the funds from the Deposit Insurance Fund, an insurance fund established by Congress and administered through the FDIC. This way, depositor's demands are met and customers will have access to their funds.

Insurances and Coverage
While depositors are automatically guaranteed coverage of $100,000 on their deposits, there are ways in which you can protect more of your money. In order to receive more coverage; the underlying and most important factor is determining how the account is titled.

Titling your account has to deal with ownership and the type of account you own at a bank. The best resource for this is the FDIC website, www.fdic.gov. There, you will find a comprehensive site outlining the factors involved in determining your coverage under FDIC.

Things to remember…

• You may be covered with more than $100,000 insurance, review the titling of your accounts with a personal banker to see if you qualify.
  
• Depositing at different branches of the same chartered bank does not increase your coverage
  
• Some banks have separate state charters and therefore has the ability to increase the insurance coverage over its three different charters. For example, Fifth Third Bank holds 3 separate charters with the FDIC
  
• The FDIC will cover your insured deposits in the event of a bank failure.
  
• Education is the key! Ask the questions of your personal banker so you understand your coverage and can rest knowing your money is insured, safe, and guaranteed. Find out what IS covered and what IS NOT covered under FDIC.
  
• Be cautious of banks with "unusually high interest rates." This could be a sign of "buying deposits" to cover liquidity shortfalls.
  
• Very few banks on the FDIC watch list fail. Regulators typically step in to help get banks back on the right track to avoid failure. There is more value in bringing a bank back from the brink of failure than allowing the FDIC to step in and take control.

More than anything else, peace of mind is crucial to ensuring your financial future. Rather than assuming you are not insured on your deposits, schedule an appointment with your personal banker to sit down and discuss proper titling of accounts and ownership to ensure maximum coverage of your money.

If you do not have a personal banker, call or stop in to your local branch and speak with a trusted financial adviser.

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Tony Cutler is a personal banker with Fifth-Third Bank. You may contact Mr. Cutler directly by calling his office at (231) 582-0440.