Following the collapse of three banks in less than a week's time, depositors from around the country have begun to focus on a question they haven't thought about for a long time: Are my deposits safe?
The collapse of SVB Financial and Signature Bank has made many customers and businesses realize that the Federal Deposit Insurance Corp. (FDIC) only insures deposits up to $250,000. So if the amount of deposits that you have in one bank account exceeds that amount and your bank fails, there's no guarantee you'll get those deposits back.
While the federal banking agencies did agree to make depositors whole at SVB and Signature, U.S. Treasury Secretary Janet Yellen told lawmakers recently that uninsured deposits would only be covered if a bank's failure would lead to "systemic risk and significant economic and financial consequences."
That said, there are smaller community banks where depositors have never lost a penny, and whose depositors are insured above the $250,000 threshold if there were to be a bank failure. Let's take a look.
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The Depositors Insurance Fund
Launched in 1934, the Depositors Insurance Fund (DIF) is a private industry association in the state of Massachusetts with about 74 member banks. Most of them are fairly small, and I believe the largest bank in the group is the Institution for Savings in Newburyport, which has roughly $4.8 billion of assets. As banks get too large, they will eventually withdraw from the fund.
In the event that a bank finds itself facing insolvency, the FDIC will insure the first $250,000 of deposits in one of DIF's member bank accounts, and DIF would cover the rest. And DIF has actually done this before. Following the savings and loan crisis in the early 1990s, which wiped out a lot of banks, DIF paid out more than $50 million to help more than 6,500 depositors at 19 failed member banks.
Interestingly, DIF also runs a liquidity fund, which "provides temporary liquidity to member banks by making loans to them secured by assets of the borrowing bank." This actually sounds a lot like the Federal Reserve's recently introduced Bank Term Funding Program (BTFP), which lets banks pledge securities at par for a loan of up to one year if a bank needs to shore up immediate liquidity.
Now, if there were to be an event in which many DIF member banks collapsed, deposits in excess of $250,000 could still be vulnerable. At the end of 2022, DIF had about $487 million of assets against uninsured deposits in member banks of more than $28.5 billion.
That said, even when banks are collapsing, there are usually ways to sell a bank's assets and recoup most of the deposits that banks owe customers, so I really view DIF as a way to plug up a hole as opposed to being a full guarantee on deposits. But this can still be incredibly important because it can take time to liquidate a bank's assets. Meanwhile, consumers and businesses have daily and weekly expenses, so it's not just about getting your deposits back, but getting them back as soon as possible.
Additionally, not only could DIF serve as a lifeline during a crisis, but it also gives depositors of these member banks added confidence about the safety of their deposits, which we are learning is really just as important to banks as actual insurance.
Not everyone can access DIF, but it's a potential model
Many of the Massachusetts banks in DIF limit their membership based on geography, which usually consists of counties in Massachusetts and any branches in other neighboring states they may have, so not everyone around the country can access DIF banks.
However, given everything that has happened recently and how depositors are feeling more vulnerable, other states may look to replicate DIF to boost investor confidence.
