Savers Should Manage Accounts Diligently

News Thursday that the federal fund protecting bank deposits has shrunk shouldn't scare bank customers, but it's a reminder to manage accounts diligently.

The balance in the Federal Deposit Insurance Corp.'s deposit-insurance fund has fallen to $10.4 billion as of June, down from more than $45 billion a year ago. The agency now has 416 banks on its "problem" list, up from 305 at the end of March. Already this year, the FDIC has closed more than 80 banks.

Even with the FDIC deposit-insurance fund at relatively low levels, "there are no concerns about the safety of depositors' principal" under the FDIC insurance limit, says Greg McBride, senior financial analyst at Bankrate.com. The FDIC may ultimately impose special fees on banks to get more cash into the fund; that could hamper bank lending and leave them stinger on deposit rates. But, Mr. McBride says, depositors shouldn't worry about the safety of their funds.

Though consumers often worry that bank failures will tie up their deposits, bank accounts generally remain liquid even after the FDIC steps into an ailing institution. That's true whether the FDIC arranges for a troubled bank to be bought quickly, as it did when pairing failed Colonial Bank with BB&T Corp. recently; or whether a bank goes into receivership, as did the recently failed Community Bank of Nevada.

"From a depositor perspective, it's all seamless, more like a bank merger than a failure," says Mr. McBride.

The key question is whether your balances exceed deposit-insurance limits.

Congress last fall authorized the FDIC to temporarily increase deposit insurance to $250,000 per person, per account, up from the long-standing $100,000. Lawmakers recently extended the higher coverage to 2013. To many banking-industry observers, that's the first step toward a permanent change. When consumers are accustomed to a higher level of government protection, "it will be tough to roll it back," says Mary Dunn, deputy general counsel for the Credit Union National Association.

To ensure complete liquidity, stay below the $250,000 cap at any one bank. Any money above that is at risk. When a bank fails, the FDIC sells whatever assets exist, and then splits the funds among the bank's creditors, including account holders whose deposits topped the FDIC limit. Historically, those account holders have recovered about 72 cents on the dollar, says David Barr, an FDIC spokesman, though that has dipped to as low as about 40 cents.

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Structure bank accounts properly for the most coverage possible. A joint savings account, for instance, provides protection up to $500,000, since two people share the account. By sharing some accounts jointly and titling others individually, a couple could protect up to $1 million in checking and savings accounts and certificate of deposit funds.

But beware: FDIC considers "joint" to mean equal access by any person listed on the account. If you share an account with a minor child who requires your signature to access the money, that, to the FDIC, "is not equal access," Mr. Barr says.

That account's entire balance would fall under the parent's total insurance coverage, potentially pushing the cumulative amount above FDIC limits. Check out myFDICinsurance.gov for an estimator that helps determine whether your deposits, as currently structured, exceed FDIC limits.

Pay attention, as well, to brokered CDs -- higher-yielding, large-denomination CDs banks sell to brokerage firms, which turn around and sell them to clients in smaller pieces. These broker-sold CDs are generally FDIC-insured, but you might unknowingly own a CD from a bank where you already have accounts, putting you above your limit. Ask your broker which bank your CD is coming from.

Note also that if you own a CD that's paying rates well above the market, the FDIC or the acquiring bank has the right to cancel that contract or revise the rates downward -- though in its purchase of troubled Washington Mutual, J.P. Morgan Chase & Co. honored well-above market rates of 5% for one-year CDs.

Of course, the price of liquidity is generally low yields. So to make your cash work hardest, shop online banks as well as local credit unions. Though you must be a member of a credit union to open an account, membership guidelines are often broad. Credit unions are backed by their own version of federal government-backed insurance from the National Credit Union Share Insurance Fund, which effectively mimics FDIC rules. Many credit unions these days offer relatively chunky annual interest rates on standard checking accounts, so long as depositors meet certain criteria.

Louisiana's Pelican State Credit Union, for instance, pays 5.25% on its eXtra Bonus Checking if account holders receive electronic statements, access the account online at least once a month, sign up for direct-deposit and use a debit card at least 15 times a month.