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April 2023

Is My Money Safe?

Know the Difference Between Assorted Federal Insurance Policies

Written by
Heather Flick McMeekin

Vice President, Principal, Portfolio Manager

The chaos that the banking sector experienced in March 2023 has led many individuals and small businesses to suddenly question the safety of their deposits and investments. In response, below is a quick summary of the different insurance policies available to depositors and investors.

Federal Deposit Insurance Corporation (FDIC)
This is the first program that typically comes to mind when considering deposit protection. Any federally or nationally chartered bank carries FDIC insurance, which protects each depositor up to $250,000 if the bank fails. Checking and savings accounts, and others such as money market accounts and CDs are covered by the FDIC at these banks. This insurance is backed by the full faith and credit of the United States government.

During the recent crisis, the Federal Reserve worked with the FDIC to insure all deposits for the two high-profile banks that failed, even over the $250,000 limit. This was a unique circumstance, designed to prevent a full-blown contagion, and one should not rely on a similar response in the future.

Separately, assets that are not covered by the FDIC include the contents of safe deposit boxes, life insurance policies, annuities, and investments.

Securities Investor Protection Corporation (SIPC)
This lesser-known program insures brokerage accounts up to $500,000 per account, including up to $250,000 in cash. It should be noted that this only protects the account in the event the broker fails or in the case of fraud. It does not protect against securities losing value. Many brokerages, like Charles Schwab, also hold “excess SIPC” coverage. At Charles Schwab, up to $150 million per customer (including up to $1.15 million in cash) is protected.

Importantly, brokerage firms are required to segregate client assets from firm assets, per the U.S. Securities and Exchange Commission’s (SEC’s) Customer Protection Rule. Segregated assets include stocks, bonds, mutual funds, and other investments such as money market funds. As a result, in the event of a brokerage failure, client assets are protected against creditors’ claims. In most cases, investors would receive their securities in-kind rather than having to accept the equivalent cash value. Typically, accounts are fully transferred to another brokerage, without any change to the quantity of securities held.

In the current environment of higher interest rates, money market funds yield considerably more than most bank savings accounts. For this reason—and since money market funds are treated as securities—it may make fiscal sense for clients to invest excess cash in a money market fund (even a Treasury money market fund) in a brokerage account.

However, given the protections described above, cash in a checking account or brokerage account should still be considered a safer option than storing it under the mattress!