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Post by Admin/YBB on Nov 23, 2022 11:48:24 GMT -6
1/4 FDICThe Federal Deposit Insurance Corporation (FDIC) was established in 1933 with $2,500 insurance deposit level that has been increased several times, most recently in 2008, to the current $250,000. COVERED are bank accounts (checking, saving), cashier’s checks, CDs, money-market accounts (these are different from money-market funds from fund families or brokerages); but safe deposit boxes are NOT covered. As ACCOUNT TYPES are insured (individual, joint, POD, trust, IRA, corporate, employee benefit plans, etc), one can increase the coverage limits by having several different types of accounts at the same bank, or by opening accounts at different banks covered by the FDIC. There are specialized deposit programs that automatically spread money among FDIC covered banks, e.g. IntraFi Network Deposits (formerly the ICS and CEDARS). Many banks also offer investment products NOT covered by the FDIC (mutual funds, annuities, investment advisory accounts) but their compliance departments make sure that there are clear physical and operational separations between the FDIC and non-FDIC products. Before the FDIC, bank runs were common. When a bank fails, the FDIC tries for another member bank to acquire the failed bank, or may run the failed bank itself. The FDIC RESOLUTIONS are famously quick for covered accounts – a failed bank may be shut on a Friday afternoon and may open under new ownership on the following Monday morning (this is unlike the resolutions of failed insurance companies or brokerages that may drag out for months or years). Noncovered amounts may take a while to be resolved and there may be losses. Some FOREIGN banks operating in the US are also covered by the FDIC, but be very careful as the FDIC insurance may be at their branch level (i.e. not all of their branches in the US may be covered by the FDIC). Many investors use brokered CDs and some of those may be from foreign banks; major brokerages often offer brokered CDs only from the FDIC covered banks (US or foreign). Money in TRANSIT among the insured accounts may be covered by the ICS. Note that ICS and CEDRAS services are now part of IntraFi Network. Cashier's checks are also money in transit but are covered by the FDIC. At one time, the savings & loans (S&Ls; thrifts) were covered by the FSLIC (now defunct) that was replaced by the RTC in 1989, and the RTC was merged into the FDIC in 1995. www.fdic.gov/www.fdic.gov/resources/deposit-insurance/www.fdic.gov/resources/deposit-insurance/faq/www.intrafinetworkdeposits.com/en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corporation |
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Post by Admin/YBB on Nov 23, 2022 11:49:34 GMT -6
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Post by Admin/YBB on Nov 23, 2022 11:50:31 GMT -6
3/4 SIPCIndustry-owned, nonprofit Securities Investor Protection Corporation (SIPC, 1970- ) insures brokerage accounts. The SIPC is federally chartered and is overseen by the SEC but is not a federal agency. COVERED on liquidation (a key requirement) of a brokerage firm due to fraud, theft or failure are securities up to $500,000 (net equity for margin account; margin debt must be paid before any recovery) that includes brokerage cash up to $250,000; major brokerage firms may have private excess insurance coverage beyond the SIPC coverage; the assets must be segregated, not commingled; the US and non-US residents/citizens are covered so long as the firm has SIPC coverage; unauthorized trades may be covered. NOT COVERED are market losses; annuities (except registered variable annuities); unregistered securities. So, most Ponzi schemes are NOT covered because the promised securities aren’t even purchased, e.g. most of Madoff related claims, etc; the consumers have some responsibility for making sure that are dealing with reputable firms using proper audits, etc. Securities issued in the names of customers are covered only if their processing was ongoing/pending when the firm failed. Also NOT covered are partners, directors, officers, owners with 5%+ interest or controlling interest of the failed firm. Covered customers must file CLAIMS within 30-60 days of the notice of liquidation filing/proceeding of the failed firm; claims may be settled within weeks or months. COMPLAINTS and disputes about brokerage operations, including account hacking, are handled by the FINRA (an industry association), the SEC, the CFTC, the state securities regulators, but NOT by the SIPC. As the assets covered are quite different from those covered by FDIC, the SIPC makes no attempt to follow the FDIC patterns; in particular, the treatments of joints accounts, PODs and trusts by the SIPC differ from those by FDIC (these matters are too specialized for the scope of this post). If one is unlucky to have accounts at 2 brokerages, and both fail, then one will be covered by the SIPC at both brokerages. MUTUAL FUNDS ONLY accounts are NOT brokerage accounts and are NOT covered by the SIPC or any other agency or organization. In the above, SECURITIES are stocks, bonds, money-market funds, Treasuries, brokered CDs, options; but excluded are commodity futures, warrants. While we may think of money-market funds as CASH equivalents, for the SIPC, they are classified as securities. It goes without saying that there is no FDIC or SIPC coverage for the money-market funds, and the SIPC coverage will kick in for the total brokerage account only if the brokerage firm fails and is under liquidation. BROKERAGE CASH is the cash held from securities sales or that waiting only to be deployed for purchases of securities (and for no other purpose). When in 2018, Robinhood/HOOD foolishly launched an interest-bearing checking account with the “claims” of SIPC coverage, the SIPC rejected that notion immediately and publicly – because that Robinhood money wasn't really waiting to be deployed for security purchases only. Robinhood mistakenly thought that it could stretch the definition of brokerage cash into an interest-bearing product (i.e. a banking product without really saying so). The SIPC wasn't amused, nor was the FDIC. An embarrassed Robinhood withdrew that product, and a couple of years later, relaunched a cash management product in partnership with banks with FDIC coverages. www.sipc.org/ www.sipc.org/for-investors/what-sipc-protects www.sipc.org/for-investors/investor-faqs |
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Post by Admin/YBB on Nov 23, 2022 11:54:10 GMT -6
4/4 BROKERAGE ACCOUNTS WITH BROKERAGE & BANKING PRODUCTS
The FDIC coverage is for brokered CDs and the SIPC coverage is for securities (including money-market funds) and brokerage cash and they are quite different.
To begin with, consider brokerage firm A and financial product B (brokered CD, money-market fund or brokerage cash). Then, the SIPC coverage is at the brokerage firm level (triggered by firm’s liquidation due to fraud, failure; total coverage $500K including $250K for brokerage cash), while the FDIC coverage is at product-CD-owner level ($250K). Following 4 cases try to clarify the SIPC and FDIC coverage issues.
Case 1 - Firm A is fine, but product-brokered-CD fails. The FDIC coverage kicks in (if the issuing bank is covered by the FDIC). The SIPC is not involved.
Case 2 - Firm A is fine, but product-money-market-fund fails. The SIPC coverage doesn't kick in; the FDIC also has no business in this. There has been only one major money-market fund failure – the Reserve Primary Fund. Much of the money was eventually recovered after being frozen for several years. That situation was NOT covered by the SIPC or the FDIC. More realistic risks of money-market funds today are not outright failures, but GATES and/or REDEMPTION FEES (least likely for government money-market funds; more likely for prime and institutional-prime money-market funds) but those situations are also NOT covered by the SIPC or the FDIC.
Case 3 - Firm A fails, product-brokered-CD is fine. The FDIC isn't involved. The SIPC coverage kicks in for securities and brokerage cash. The SIPC coverage of $500K would be for the total account value (net equity for margin account) including $250K for brokerage cash.
Case 4 – Firm A fails, product-brokered-CD fails, product-money-market-fund fails. A total disaster, may be an economic collapse. In that unlikely and absurd case, the SIPC will cover $500K (max) and the FDIC $250K (max), for a combined total of $750K (max), more if the brokerage firm has private excess insurance coverage beyond the SIPC coverage (most major brokerages do). Brokerage accounts larger than the covered amounts may have partial recoveries and losses on the excess amounts.
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Post by Admin/YBB on Feb 9, 2023 9:06:11 GMT -6
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Post by Admin/YBB on Mar 17, 2023 7:03:33 GMT -6
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Post by Admin/YBB on May 4, 2023 10:53:03 GMT -6
FDIC Proposals to Modify the FDIC Insurance
The regional banking crisis of 2023 was caused by a) Underwater HTM* Treasuries/MBS and illiquid CRE holdings (the accounting rules allow these to be carried at higher purchase prices, but they became underwater when interest rates rose sharply) and b) spectacular bank runs accelerated by social-media rumors. In the wake of this crisis of 2023, the FDIC has floated several proposals for the Congress or Treasury to act. Limited Coverage: Maintaining the current deposit insurance framework, which provides insurance to depositors up to a specified limit (possibly higher than the current $250,000 limit) by ownership rights and capacities. Unlimited Coverage: Extending unlimited deposit insurance coverage to all depositors. Targeted Coverage: Offering different deposit insurance limits across account types, where business payment accounts receive significantly higher coverage than other accounts. There is also talk for increased regulatory supervision (by the Fed, OCC, States) of small/medium size banks to factor for these accounting and balance sheet issues (HTM vs AFS*), and bank liquidity (banks can tap the FHLBs and the Fed Discount Window). The experience was that uninsured institutional deposits fled the regional banks quickly to the extent possible (some had to be held due to loan or funding restrictions), and retail deposits (uninsured or insured) left more gradually for higher rates available elsewhere. Summary www.fdic.gov/news/press-releases/2023/pr23035.htmlLink to full report www.fdic.gov/analysis/options-deposit-insurance-reforms/index.htmlFDIC Chair's statement www.fdic.gov/news/speeches/2023/spmay0123b.html*HTM = Hold-to-maturity; these are not marked-to-market AFS = Available-for-sale; these are marked-to-market Some AFS can be shifted to HTM, but the reverse moves are more difficult. Edit/Add, 5/12/23. In the interim, the FDIC is using its rule-making authority to impose 12.5 bps fees for 8 quarters on banks based on their uninsured deposits above $5 billion; there is a 60-day comments period. The FDIC cited this as a legal requirement to recover its costs related to the rescues of 3 recently failed banks (SVB, Signature, First Republic) where all deposits were insured. This almost looks like a soft expansion of the deposit insurance that may become permanent with lower fees. www.fdic.gov/news/press-releases/2023/pr23037.html
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Post by Admin/YBB on Apr 1, 2024 8:00:53 GMT -6
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