Financial institutions can be classified into two broad group depository and nondepository based on whether or not they accept deposits as traditional banks do.
Depository Financial Institutions
The vast majority of financial transactions take place at depository financial institutions commercial banks (both brick-and-mortar and Internet), savings and loan associations (S&Ls), savings banks, and credit unions. Although they’re regulated by different agencies, depository financial institutions are commonly referred to as “banks” because of their similar products and services. What sets these institutions apart from others is their ability to accept deposits; most people use them for checking and savings account needs. These depository financial institutions are briefly described in Exhibit 4.2.
Depository Financial Institutions
The vast majority of financial transactions take place at depository financial institutions commercial banks (both brick-and-mortar and Internet), savings and loan associations (S&Ls), savings banks, and credit unions. Although they’re regulated by different agencies, depository financial institutions are commonly referred to as “banks” because of their similar products and services. What sets these institutions apart from others is their ability to accept deposits; most people use them for checking and savings account needs. These depository financial institutions are briefly described in Exhibit 4.2.
Nondepository Financial Institutions
Other types of financial institutions that offer banking services, but don’t accept deposits like traditional banks, are considered nondepository institutions. Today you can hold a credit card issued by a stock brokerage firm or have an account with a mutual fund that allows you to write a limited number of checks.
Other types of financial institutions that offer banking services, but don’t accept deposits like traditional banks, are considered nondepository institutions. Today you can hold a credit card issued by a stock brokerage firm or have an account with a mutual fund that allows you to write a limited number of checks.
- Stock brokerage firms offer several cash management options, including money market mutual funds that invest in short-term securities and earn a higher rate of interest than bank accounts, special “wrap” accounts, and credit cards.
- Mutual funds Like stockbrokers, mutual fund companies offer money market mutual funds. Other nondepository financial institutions include life insurance and finance companies.
How Safe Is Your Money?
Today, the main reason that a bank goes out of business is its purchase by another bank. Almost all commercial banks, S&Ls, savings banks, and credit unions are federally insured by U.S. government agencies. The few that are not federally insured usually obtain insurance through either a state-chartered or private insurance agency. Most experts believe that these privately insured institutions have less protection against loss than those that are federally insured. Exhibit 4.3 lists the
insuring agencies and maximum insurance amounts provided under the various federal deposit insurance programs. Deposit insurance protects the funds you have on deposit at banks and other depository institutions against institutional failure. In effect, the insuring agency stands behind the financial institution and guarantees the safety of your deposits up to a specified maximum amount. The ordinary amount covered per depositor by federal insurance is $100,000, which was temporarily increased to $250,000 during the financial crisis of 2009. This higher amount is expected to be in effect until at least 2014. The current discussion applies the new higher amount of $250,000 per depositor under federal insurance.
Deposit insurance is provided to the depositor rather than a deposit account. Thus, the checking and savings accounts of each depositor are insured and, as long as the maximum insurable amount is not exceeded, the depositor can have any number of accounts and still be fully protected. This is an important feature to keep in mind because many people mistakenly believe that the maximum insurance applies to each of their accounts. For example, a depositor with a checking account balance of $15,000 at a branch office of First National Bank, an MMDA of $135,000 at First National Bank’s main office, and a $50,000 CD issued by First National Bank is entirely covered by the FDIC’s deposit insurance amount of $250,000 per depositor. If the CD were for $150,000, however, then the total for this depositor would be $300,000 and thus not entirely covered under the plan. However, purchasing the CD from another bank, which also provides $250,000 of deposit insurance, would fully protect all of this depositor’s funds.
Now that banks are offering a greater variety of products, including mutual funds, it’s important to remember that only deposit accounts, including certificates of deposit, are covered by deposit insurance. Securities purchased through your bank are not protected by any form of deposit insurance. As a depositor, it’s possible to increase your $250,000 of deposit insurance if necessary by opening accounts in different depositor names at the same institution. For example, a married couple can obtain as much as $1,500,000 in coverage, apart from the coverage of CDs noted below, by setting up several accounts:
Deposit insurance is provided to the depositor rather than a deposit account. Thus, the checking and savings accounts of each depositor are insured and, as long as the maximum insurable amount is not exceeded, the depositor can have any number of accounts and still be fully protected. This is an important feature to keep in mind because many people mistakenly believe that the maximum insurance applies to each of their accounts. For example, a depositor with a checking account balance of $15,000 at a branch office of First National Bank, an MMDA of $135,000 at First National Bank’s main office, and a $50,000 CD issued by First National Bank is entirely covered by the FDIC’s deposit insurance amount of $250,000 per depositor. If the CD were for $150,000, however, then the total for this depositor would be $300,000 and thus not entirely covered under the plan. However, purchasing the CD from another bank, which also provides $250,000 of deposit insurance, would fully protect all of this depositor’s funds.
Now that banks are offering a greater variety of products, including mutual funds, it’s important to remember that only deposit accounts, including certificates of deposit, are covered by deposit insurance. Securities purchased through your bank are not protected by any form of deposit insurance. As a depositor, it’s possible to increase your $250,000 of deposit insurance if necessary by opening accounts in different depositor names at the same institution. For example, a married couple can obtain as much as $1,500,000 in coverage, apart from the coverage of CDs noted below, by setting up several accounts:
- One in the name of each spouse ($500,000 in coverage)
- A joint account in both names (good for 500,000, which is $250,000 per account owner)
- Separate trust or self-directed retirement (IRA, Keogh, etc.) accounts in the name of each spouse (good for an additional $250,000 per spouse)
In this case each depositor name is treated as a separate legal entity, receiving full insurance coverage the husband alone is considered one legal entity, the wife another, and the husband and wife as a couple a third. The trust and self-directed retirement accounts are also viewed as separate legal entities. The Certificate of Deposit Account Registry Service (CDARS) allows a bank to provide customers with full FDIC insurance on CDs up to $50 million. This is available to businesses, nonprofit companies, public funds, and consumers.
.
0 comments:
Post a Comment