What to know about bank deposits and the FDIC Deposit Insurance Fund

All week, a parade of Biden administration officials has sought to drive home the message that taxpayers will not bear the financial burden of the government's guarantee that all of the depositors at two failed banks — Silicon Valley Bank (SVB) and Signature Bank — will have their funds available to them immediately. 

On Monday, President Joe Biden vowed that Silicon Valley Bank account holders would "have access to their money as of today," and that included "small businesses across the country that bank there and need to make payroll, pay their bills and stay open for business." And Treasury Secretary Janet Yellen sought to assure Congress Thursday that "our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them." 

The guaranteed deposits extend beyond the Federal Deposit Insurance Corporation (FDIC) fund insurance that promises depositors' funds up to $250,000 will be covered, and only a very small percentage of those bank customers held accounts under the FDIC maximum. At SVB, 94% of domestic deposits were uninsured, while 90% of Signature Bank's deposits were uninsured, according to a report by S&P Global Market Intelligence. That is far higher than the proportion held by large U.S. banks — about 47% — according to S&P Global.

Mr. Biden said all of these depositors would be covered through the Federal Deposit Insurance Corporation fund, although equity and bondholders in the banks will lose their investments: "That's how capitalism works," Mr. Biden said.

Some of the businesses covered are sizable. Roku, a company that has about $1.9 billion in cash, revealed in an SEC filing last week that its $487 million in deposits with SVB "are largely uninsured." Roku's other $1.4 billion is "distributed across multiple large financial institutions." Online video game company Roblox also disclosed in a March 10 securities filing that roughly 5% of the company's $3 billion in cash and securities, or $150 million, was held at the bank. The company said in the filing that the bank's collapse "will have no impact on the day-to-day operations of the company."

What is the Deposit Insurance Fund and how does it work? 

Financial institutions pay quarterly into the Deposit Insurance Fund or "DIF," and the size of their fees is based on an assessment of the institution's size and risk profile. 

The account exists to repay insured depositors when a financial institution fails, explained Greg McBride, chief financial analyst at Bankrate.com.

"Where that fund comes into play is in the event that a bank fails because their liabilities exceed their assets," which may not ultimately be the case with SVB and Signature Bank, McBride said.  

How much does the Deposit Insurance Fund have now and will it have the funds if more banks fail? 

By the end of the fourth quarter of 2022, the DIF had $128 billion in its coffers, which is "fully sufficient" to cover SVB and Signature Bank customers, according to a senior Treasury Department official.

In the wake of the 2008 financial crisis, the DIF was $21 billion in the red in 2009, when it had to provide funds to depositors of the more than 100 financial institutions that had failed, which ultimately took a cash infusion of $128 billion.

The financial hit the DIF will take because of the collapse of SVB and Signature will depend on whether buyers are found for the failed banks' assets, and what the selling price is, which is so far unknown, McBride said. 

"Because the issue isn't bad loans, but quality assets currently selling for less than face value, the hit to the DIF may be minimized," McBride said. 

In SVB's case, many of the deposits in excess of the $250,000 insurance guarantee were payrolls for companies, and businesses often have other ways to manage payroll accounts, including specialty accounts or mechanisms with added protections, said J. Michael Collins, professor of public affairs and human ecology and an expert in consumer and personal finance. 

Republican Sen. Marco Rubio of Florida predicted on "CBS Mornings" Thursday that "potentially every American with a bank account is going to have to pay higher bank fees." Rubio said banks would be able to assess a fee that could potentially come from banking customers to pay their insurance guarantee. 

"So you have people who have nothing to do with that bank, that have small deposits, could potentially be paying higher fees as a result of the mismanagement of one bank," Rubio said. 

What will happen to the $250,000 cap and the Deposit Insurance Fund in the future?

Rep. Blaine Luetkemeyer, a Republican, member of the House Financial Services Committee and a former banker, told Politico the federal government should temporarily insure every bank deposit in the country to increase confidence in the U.S. financial system.

But, at least for now, Luetkemeyer is in the minority. 

Goldman Sachs said Wednesday that at this stage, "we do not expect Congress to act on deposit insurance." 

"While some lawmakers from both parties have raised the possibility of insuring all deposits or raising the cap, other lawmakers from both parties have expressed opposition," Goldman Sachs said. "Increasing deposit insurance without accompanying regulatory changes looks politically difficult, but an agreement on regulatory changes would substantially slow approval."

What to do if you have more than $250,000 in liquid assets 

So how can people and companies with more than $250,000 in liquid assets try to protect their investments? 

Since individuals are insured for up to $250,000 per person, for a couple, $500,000 in total deposits would be covered by the FDIC. Depositors may also open accounts at multiple institutions and still be insured for $250,000 per person, per bank, Collins said.

There are also brokerage accounts that would be covered by the Securities Investors Protection Corporation, Collins said. And although somewhat controversial, there are also custodial accounts using a Certificate of Deposit Account Registry Service that can cover very large deposits. 

"Using a combination of these can allow someone to hold very large aggregate demand deposits if they wanted to," said Collins, who says it's always wise to speak with a financial adviser, particularly for those with hundreds of thousands of dollars in liquid savings.  

Consumer confidence in the banking sector is still shaky and may be for some time. But McBride said the main point customers should keep in mind is that "your money is safe — and it's available."

— Alain Sherter contributed to this report