How FDIC Bank Deposit Insurance Works

Bank failures got you rattled? Check your federal deposit insurance

Outside the entrance to the Federal Deposit Insurance Corporation building

Corbis / Getty Images

John Waggoner,

AARP

En español

Published September 06, 2022

/ Updated May 01, 2023

Wall Street and Main Street got shocking news on Monday, May 1, when the Federal Deposit Insurance Corp. (FDIC) announced that First Republic Bank had failed and was sold to J.P. Morgan Chase & Co. It was the second-largest bank failure in U.S. history.

The First Republic failure follows the March 10 failure of Silicon Valley Bank, and the March 12 collapse of Signature Bank. On March 19, UBS Group announced its takeover of troubled Credit Suisse, a venerable European bank and Switzerland’s second-largest.

A historic photo shows people watching as a notice from the Federal Deposit Insurance Corporation is tacked on the door of a failed New Jersey bank in 1939, assuring investors that most deposits are protected.

A notice from the Federal Deposit Insurance Corporation is tacked on the door of a failed New Jersey bank, February 14, 1939, assuring investors that most deposits are protected.

Bettmann / Getty Images

The collapses slammed shut a quiet period in banking: Silicon Valley’s was the first bank failure since October 2020. Bank failures rarely occur without affecting other banks and businesses; bank stocks were down sharply when trading reopened after the weekend as investors and depositors grew nervous about the safety and soundness of other banks.

The FDIC took the extraordinary step of guaranteeing all deposits in Silicon Valley Bank and Signature; most of those deposits were not covered under FDIC rules. J.P. Morgan took over all the deposits and most of the other assets of First Republic, and all depositors had access to their accounts as of May 1.

There’s no guarantee that the FDIC will be as generous in the future. And that’s why you should know the limits of deposit insurance — and take steps if any of your accounts is over the limit.

The limits

FDIC insurance covers bank checking accounts, savings accounts, money market deposit accounts and certificates of deposit as well as cashier’s checks and money orders. Deposit insurance doesn’t cover stocks, bonds, mutual funds or other investments purchased through a bank, nor does it cover the contents of safe-deposit boxes. Investors in a bank’s stock are not covered, either.

FDIC insurance protects up to $250,000 per depositor, per deposit category, per insured bank. Let’s break that down.

Per depositor. Let’s say you have a checking account and your spouse has a checking account at the same bank. Each account is insured to $250,000, for a total of $500,000. FDIC insurance also covers joint accounts separately; the owners of the account don’t have to be related. Each co-owner is insured for $250,000 for his or her combined interest in all the joint accounts at the institution. A couple could each have personal checking accounts with $250,000 and a joint account with $500,000 at the same bank and be insured for a total of $1 million.

Per deposit category. The FDIC insures 14 different types of deposits. The four most common categories are single accounts, joint accounts, trust accounts and certain self-directed retirement accounts, each insured up to $250,000 for each owner at the same bank. If you have a checking account with $250,000 and an individual retirement account worth $250,000 at the same bank, you’re insured for $500,000.

Per bank. You could have $250,000 each at 10 FDIC-insured banks and be covered for $2.5 million. Bear in mind that credit unions are not covered by FDIC insurance; instead, the National Credit Union Administration backs credit union share accounts for $250,000 under similar rules. There are still a few savings and loan institutions, which are covered by FDIC insurance. The FDIC has a handy tool to tell you if it insures your bank, as well as one that tells you how much FDIC coverage you have.

How it works

The FDIC has two ways to take over a troubled bank: It can merge the bad bank into a healthy bank or liquidate the bank entirely. The merger — actually a purchase and assumption — is the preferred method. Your accounts simply get shifted into the new bank. All direct deposits, including Social Security payments, will automatically be redirected to the deposit accounts at the acquiring bank.

Sometimes, however, the failed bank is in such serious trouble that the FDIC must liquidate it, and this was the case with Silicon Valley Bank and Signature Bank. In this case, the FDIC will pay you directly by check up to the insured balance in each account. Such payments usually begin within a few days after the bank closing.

If you have more money in the bank than FDIC insurance covers, you may wind up losing all of your uninsured deposits.

Unlike with a purchase and assumption, however, any uncleared checks you’ve written will be returned, and any automatic deposits or payments may also need to be rerouted to a new bank. And, of course, you’ll need a new account to reroute those checks and deposits to.

The FDIC will share losses with J.P. Morgan Chase on First Republic’s bad loans. Taxpayers will not be paying for the three banks’ failures. The FDIC is backed by payments made by member banks. The FDIC’s Deposit Insurance Fund totaled $128 billion as of the end of 2022 — about 1.3 percent of the assets it insures. When the banking system is stressed and bank failures spike, the FDIC can — and has — authorized special extra levies on banks to shore up the insurance fund. So far, no insured depositor has lost a dime since the FDIC’s creation.

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