Business Advisory Services – FDIC Insurance Limits Changed

On January 1, 2013 FDIC insurance limits changed. Businesses now have exposure as unsecured investors in their financial institution for aggregate deposits in excess of $250,000. Aggregate deposits comprise all demand deposit accounts, savings, certificates of deposit and other accounts that are under the same tax identification number or when there are different tax identification numbers for the specific purpose of FDIC insurance limits.

This is not new. Prior to the unlimited insurance for non-interest bearing accounts (December 31, 2010 to December 31, 2012), this was the norm. Business managers need to be aware of this important change and begin to manage and address the risks associated with deposits in excess of FDIC insurance.

Options to manage the risk are:

  1. You could decide to believe in and rely upon the government’s pledge that some banks are too big to fail and place money with one of those institutions. Of the 29 such banks worldwide, eight are in the United States. Bank of America and Wells Fargo are the two with operations in New Mexico. If you choose this option for your depository relationship, we would continue to recommend you still monitor the financial health and soundness of the financial institution.
  2. You could deposit excess funds in a money market account where the stated goal is to maintain a $1 share value and take advantage of the Security Investor Protection Corporation (“SIPC”) insurance and other private securities insurance depending on institution. You must understand that the investments could lose value and that the SIPC insurance only covers fraudulent investments (i.e. that the underlying investments in the fund do not exist). SIPC insurance covers $500,000 per account, including up to $250,000 for cash claims. Other private insurance could increase that coverage. The financial health and soundness of the private insurance company must be monitored – we can all remember AIG. Investing in funds whose goal is maintaining a $1 share value, typically in short duration US government securities, should be part of this strategy. Depending on the amount held, you may need multiple accounts.
  3. You could continue to use of your existing bank and monitor their financial health and soundness.
  4. You could choose to use different financial institutions (has to be a different “Charter” under FDIC rules) to take advantage of the insurance and to reduce the risk of excess funds with different financial institutions (different management teams at financial institutions could focus on different industries and on different underwriting criteria). This could be positive in many ways, as the business may have additional borrowing options and competition for their business from more than one financial institution.

Lastly, we may see an increase in the marketing of overnight REPO’s (Repurchase Agreements), Certificate of Deposit Account Registry Service (“CDARs”) and other methods to reduce risk of loss. Always assess the risk of any of the options, for example REPO’s can be secured or unsecured.

As trusted business advisors at Pulakos CPAs, we don’t perform Management’s job. We do however help management to perform their jobs better, because performance is what matters.

By J. Brad Steward, Managing Shareholder, Audit