Morning Muse (7/16/24)
Most of us have heard that the FDIC insures bank deposits to $250,000. But what does that mean? And how does that compare to funds held at brokerage firms, such as Schwab?
FDIC
The Federal Deposit Insurance Corporation or FDIC was formed in 1933. One of the services they offer is to insure bank deposits to at least $250,000 per depositor, per ownership category, per financial institution. This FDIC insurance becomes effective in the event of bank failure.
Covered categories of deposits include checking accounts, savings accounts, money market accounts, CDs, and cashier’s checks/money orders. Not covered categories include stock and bond investments, annuities, mutual funds, life insurance policies, safe deposit boxes and their contents, U.S. Treasury bills, bonds, and notes, municipal securities, and crypto assets.
For those of you who generally maintain more than $250,000 in bank deposits, whether for personal or business reasons, your banker should be willing to work with you to maximize FDIC insurance. Options include different account numbers and ownership categories, as well as interbank arrangements.
COMPARED TO:
How does this compare to brokerage firms? Let’s look at Schwab, since they are the primary custodian for our managed portfolios.
SEGREGATION
All client securities are segregated from broker-dealer securities, or securities owned by Schwab. This is a requirement for all broker-dealers (B/D’s) as per SEC guidelines. In the unlikely event of an insolvency, customer securities are not available to general creditors and are protected against creditor claims.
SIPC
The Securities Investor Protection Corporation (SIPC), dating to 1970, is similar to the FDIC. The SIPC protects customers of B/D’s, including Schwab, if/when a B/D fails. SIPC covers up to $500,000 per account, including up to $250,000 in cash, in the event customer assets are unaccounted for due to recordkeeping errors or misappropriation. SIPC does not cover commodity futures contracts, fixed annuity contracts, foreign currency, or market value fluctuations.
PRIVATE INSURANCE
In addition, Schwab maintains a business relationship with Lloyd’s of London as underwriter for additional brokerage insurance. This “excess SIPC” protection of securities and cash is limited to a combined return to any customer from the trustee (assuming Schwab would be in receivership), SIPC, Lloyd’s, or other London insurers, of $150 million, including up to $1,150,000 in cash.
BROKERED CD’s
Several of you have CDs in your Schwab accounts from various banks. JP Morgan Chase, CitiBank, and others commonly offer what are referred to as brokered CDs. These CDs have FDIC insurance through the primary bank offering such CDs.
OTHER BROKER-DEALERS
The information shared here is specific to Schwab. It is common for the large B/Ds to have both SIPC protection and additional private liability insurance through a Lloyd’s consortium. We would encourage you to learn more about how this works for the B/D where your assets are held.
SUMMARY
Commercial banks have FDIC insurance up to $250,000 and many can work with you to protect most or all of your funds with them. Schwab, and most other broker-dealers, whether discount firms or Wall Street firms, have SIPC coverage as well as additional private insurance coverage.
If you would like us to evaluate your holdings, whether held at a commercial bank or through a broker-dealer, we would be pleased to do that for you. We can help you determine what is covered by FDIC or SIPC insurance or private insurance and assist you in minimizing or mitigating risk of loss in the event of firm failure. We can also, if you wish, evaluate the sustainability of your asset base and cash flow in light of inflation and other factors.
And until we see you again, wishing you only the best.