With all these new online banks which are pretty much just virtual branches of a lot of regional banks, I thought it would be a good idea to look more into this whole FDIC insurance thing we put so much trust into. First some quick basics, taken from the FDIC website:

What Does the FDIC Insure?
The Federal Deposit Insurance Corporation (FDIC) is a government corporation that insures all deposits at insured banks, including checking and savings accounts, money market deposit accounts, and certificates of deposit (CDs), up to the insurance limit. Use this form to find out if your bank is insured.

How Much Does It Cover?
The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.

Way To Increase Your Coverage
Since accounts at different banks are insured separately, the easiest way to increase your coverage is to simply keep less than $100,000 at any one bank. You could have $100,000 each at 500 different banks, and be insured for $50 million in total.

You may also qualify for more than $100,000 in coverage at one insured bank if you own deposit accounts in different ownership categories. For example, here is a way that a husband and wife could qualify for $600,000 in total insurance all at one bank:

What Happens If My Bank Really Fails?
First off, I would note that the FDIC does not notify people that their bank is about to fail or has failed. The only way to you find out is when your debit card gets denied or you walk up to your bank and it has a new name. Here is a list of banks that have failed since October 2000, which includes a summary how it was handled.

The Finance Buff has a good post about what happens when your bank goes out of business. The example given is Metropolitan Savings Bank in Pittsburgh, which the FDIC took over just three months ago.

Here’s the timeline: The FDIC announced the bank’s takeover on Thursday. By Monday the deposits have been taken over by another bank, the branches were re-opened, and the insured people have access to their money again.

But, out of the $12 million in deposits in the bank, there were 30 account holders with total assets of $1.2 million not insured by the FDIC. Those people are now creditors to the receivership of the failed bank, and must wait as the FDIC liquidates the bank’s remaining assets. Waiting on the light fixtures to be sold until you can get any of your money back? Not good.

The takeaways here are

1. Banks still fail, and without warning.
2. If your money is insured, it is unlikely any failure will interrupt access to your funds for long. Either another bank will take over (they all want more deposits), or the FDIC will pay out from their reserves.
3. Never exceed FDIC insurance limits, because you may never see your uninsured money again.

Update: Please see my FNBO Direct Review for more info!

Rate chasers rejoice! Look likes with the expiration of the HSBC Direct 6% APY promotion yesterday, the online bank FNBO Direct has decided to offer the rate of 0.85% APY as of January, 2013. $1 to open, no monthly minimums, no credit check, previous rate was 5.25% I believe. Anybody use this bank before?

As usual, check out my Ultimate Rate Chaser Calculator to see the potential profit from a move after accounting for transfer time. I hope they don’t pull what Umbrella Bank did – change their guaranteed date from 12/31 to 7/31 a day into the promotion. Thanks Steve for the tip.

If you’re comparing checking accounts, what are the features that one should consider? It’s not all about the interest rate. In no particular order, I would want:

Low minimum balance requirement – This helps include more people, and there is less stress about low-balance or maintenance fees.

Consistently high interest rate – I would think that a history of competitive rates and also the ability to keep those rates high yet still be profitable is important. I would guess that this means either restricting the accounts to people comfortable with the internet and thus less likely to need too much hand-holding or human interaction, or having a strong mortgage division.

Easy to make withdrawals – This could mean a large ATM branch network or automatic ATM fee rebates. Free wire transfers and money orders would also be a plus.

Easy to make deposits – Depending on your preference and how often you need checks, here you would need either local ATMs, postage-paid deposit envelopes, or even the new system at a few banks where you can simply scan in your check deposits from home.

Easy to transfer money between banks – This means being able to initiate transfers to other bank accounts through your account with only the routing number and account number. Also, this means being able to access your account by third parties in the same way. On the other hand, maybe some people like this to be restricted for security reasons?

Online interface – Being able to see your account balances clearly at a glance, dependable online BillPay, and a good balance between security and accessibility. Don’t require my passwords to be 18 characters long and a retina scan to log in.

Customer Service – Even though I don’t call in very often, being able to reach a knowledgeable and helpful human when needed in is very important to me. A good online messaging systems is also good for creating a paper trail.

The Rest – Some other things that come to mind are free checks, low or no overdraft fees, overdraft protection, free notary services, extended branch hours, drive-up ATMs, Quicken or MS Money synchronization, return of canceled checks, and free candy at the teller windows 🙂

I feel like I’m still missing something…

Thanks to everyone who let me know about this. I just confirmed with Emigrant Direct that as of about a week ago, they are no longer allowing you to make transfers between their savings account and other external accounts other than the “official” linked checking accounts. Some people are reporting that this only applies to withdrawals, and not deposits. Supposedly, they will be sending out letters about this. Um, why not send them out beforehand?!

This definitely hurts the flexibility of this account, but puts it in line with some other banks like E-Loan. Of course, the stated issue is “security”. But why can I still do these transfers with my other checking and savings accounts from huge banks like Bank of America, Washington Mutual, and Citibank? Anyways, please be warned if you have any transfers like Treasury Bill ladders scheduled.

As of May 1, 2007, WaMu is rearranging their fee schedule slightly. American Express Traveler’s Checks, ATM Mini-Statements, Money Orders, and Notary signatures will be free. However, it appears that using a non-WaMu ATM will now incur a $2 fee on their end. This works out great for me as I never use non-WaMu ATMs, but getting free money orders and notary signatures will save me a few bucks here and there. Look for a flyer in your most recent bank statement.

Also see: WaMu Free Checking and 5% APY Savings Account Review

A reader asked me if there was a difference between a FDIC-insured “savings” account and an FDIC-insured “money market” account. A bit of online searching and the venerable Wikipedia yielded the answer, plus some interesting facts about savings accounts.

First of all, why do savings account usually have higher interest rates than checking accounts? I think most of us know that banks make money by using our cash deposits and lending it out to others via mortgages, personal loans, or credit cards. However, we also expect that if we do want to withdraw our money, it will be there. To achieve this, each country sets its own reserve requirements, essentially how much cash the bank must physically keep in a vault somewhere to meet expected withdrawal demands.

As of 2006, the required reserve ratio in the United States was 10% on transaction deposits (checking accounts), and zero on time deposits (savings accounts). Due to fractional-reserve banking, having no reserve requirement allows the banks to lend out much more than their actual deposits.

Added: A quick explanation… At a reserve ratio of 10%, let’s say I put in $100. That means the bank can lend out $90. If whoever borrows that $90 put it in a bank, then the new bank can lend out 90% of that, or $81. This could repeat forever, leading to banks lending out 100+90+81+… = $1,000 for each $100 in deposits. This is just for a checking account. For a savings account, with zero required reserves, a bank could theoretically lend out an infinite amount of money (100+100+100+…). Aren’t you glad your money is insured now? 😉

The main difference between checking and savings accounts are their transaction limitations, as outlined by Regulation D. You can only transfer funds out of your savings account up to six times per month by any pre-authorized method like online or telephone transfers, even to a checking account within the same bank. A max of three of these can be via check or debit card. You can still make unlimited withdrawals in person via a teller or ATM.

This is why it can be difficult to use your online savings account (at over 5% interest) as your sole account for paying bills and such instead of your checking account (often at 0%). Bank often charge fees for breaking this rule, and must close accounts where this transaction limit is repeatedly exceeded.

Back to the initial question – Is there a difference between a FDIC-insured “savings” account and an FDIC-insured “money market” account? From what I could find, no. They are both time deposit accounts, just with different naming conventions. Traditionally, money market accounts have a higher minimum balance requirement, and are more likely to offer checkwriting or a debit card (subject to the limits above). These both remain different from money market mutual funds, which are usually not FDIC-insured and are instead a collection of short-term debt instruments.