With the $700+ billion bailout bill signed into law, the FDIC now insures more deposits per account holder per bank. Here are the new limits for the most common account types, effective October 3.

• Single accounts are insured up to $250,000 per owner through December 31, 2009
• Joint accounts are insured up to $250,000 per co-owner through December 31, 2009
• IRAs and other retirement accounts are insured up to $250,000 per owner
• Trust accounts are insured up to $250,000 per owner per benficiary

Single and joint accounts will revert to the $100,000 maximum after December 31, 2009 unless a new law is created before then to extend the increased limits.

These increases don’t have much of an effect on everyday depositers like me. It’s unlikely that individuals keep more than $100,000 in a single bank account. These increased limits do help small businesses that need to keep cash on hand to fund payroll accounts and other operating accounts.

Small banks are also boosted by this new law because other businesses may willing to increase deposit balances. More capital available to these small banks can in turn make more cash available for local lending.

The increase may, according to Congress, create more confidence in the safety of the banking system, preventing a massive wave of withdrawals. When people lose confidence in banks, they withdraw their money to keep cash on hand, and the banking industry and the government want to prevent that as much as possible.

Suze Orman is now involved with a marketing campaign for the FDIC, pointing consumers to EDIE, a calculator that halps determine how much of your money held at banks is insured.

The aim of the campaign is to help Americans feel secure about leaving their money in banks. The government and the banking industry want to prevent customers from withdrawing money in volatile markets to keep “safe” in a shoebox underneath the bed or in a coffee can buried in the backyard.

According to the marketing materials (you can watch the commercials here), the FDIC has not lost one cent of insured money for customers in the group’s 75 year history.

The EDIE calculator works well, taking into account different types of accounts, including IRAs and PODs. It prints a report for you describing the covered amount of your deposits. The calculator does not, however, tell you if the bank where your money is held is a member of FDIC. EIDE assumes that the institutions you enter as you provide your banking information are covered.

To determine whether your banks are members of FDIC and your deposits are insured, use the FDIC Bank Find.

Shares in Washington Mutual, the country’s largest savings and loan bank, dropped over 30% in one day due to fears that this institution will be the next in a series of failures of financial companies. WaMu holds $310 billion in assets, a huge amount of deposits. The FDIC, which might step in to take over the bank, has only $53 billion set aside to assist customers when their banks collapse.

There are a few scenarios. A larger domestic or foreign bank could step in to take over all or part of Washington Mutual. This would be a risky move for the acquiring bank, however, thanks to about WaMu’s $180 billion tied into mortgage-related loans and expectations of massive losses this year.

If the FDIC steps in, it won’t be able to cover all deposits with reserves. Perhaps it’s possible for a combination acquisition of WaMu by FDIC and a private bank. Private equity firms could also infuse capital into the company, but this is another risky choice for equity investors.

It’s more likely that, if necessary, Washington Mutual will be taken over by FDIC, and any shortfall in deposits will be assisted by the U.S. Treasury printing more money. This increase in the money supply would allow WaMu’s customers to withdraw their accounts in full when needed, but the real value of that money—and the value of the money held by anyone who saves or invest using the U.S. dollar—will be less. How much less? That remains to be seen.

I do not have any money in Washington Mutual. I’ve considered opening a savings account thanks to the high interest rates they’ve offered recently, but my earlier laziness may have saved me stress today.

While in most circumstances your money held at a bank insured by the FDIC is safe, when the industry is in crisis with a string of failures, it makes sense to play a little safer than usual. I intend on always keeping my savings accounts within the FDIC limits. While I once considered simplifying my finances by reducing the number of banks in which I hold accounts, it may make more sense to diversify among a number of banks and credit unions.

Photo: P.C. Loadletter
Washington Mutual Stock Falls on Investor Fears, Eric Dash and Geraldine Fabrikant, The New York Times, September 10, 2008

The FDIC has announced that two more banks failed yesterday, bringing the total this year to seven. 1st National Bank of Nevada and First Heritage Bank operate a total of 28 branches in Nevada, Arizona, and California. Neither of these banks was included in the list of the top ten banks likely to fail.

Account holders in these two banks will be able to access their money through check writing and ATM withdrawals throughout the weekend, even beyond the FDIC limits.

On Monday, the two banks will be known as “Mutual of Omaha Bank” and customers will have access to their full balances. The ease of the takeover operation brings to mind the idea that “money” is often nothing more than data bits. A computer at a bank where I hold an account keeps a database record with my balance, and that database record can be moved from one place to another. “Money” as we know it isn’t involved in the slightest.

FDIC shutters two more regional banks, CNN Money, July 26, 2008

October 6, 2008 Update: The FDIC has increased the maximum deposits covered under federal insurance. The new FDIC coverage limits are outlined here.

Without getting too specific about the company I work for, a large company like mine has to make efficient use of its financial assets. Most of a company’s money should be invested in bonds, equities, or even more complex financial instruments, but a portion needs to be in regular deposit accounts like savings and certificates of deposit to maintain liquidity. The best strategy when dealing with millions of dollars in CDs is to distribute the money across a large number of banks across the country. As I mentioned earlier, as long as a bank is insured by the Federal Deposit Insurance Corporation (FDIC), the money is safe, up to $100,000 per depositor per account.

The FDIC does more than protect up to $100,000, and the details are important.

At any particular bank, single accounts—that is, not joint accounts—are insured up to $100,000 in total. For example, if you have three accounts, one checking account with $3,000, one savings account with $50,000, and one CD with $25,000, you’re under your limit. If your total money held in single accounts at that bank exceeds $100,000, only $100,000 is protected (though the FDIC will do its best to provide access to all of your funds if the need arises).

There is a “danger” with CDs, as well as savings account, when it comes to interest earned. If you have maximized your coverage with a CD whose balance is $100,000, the interest you earn would put you over the limit once the bank credits your account. The risk of never seeing that money is very low, but it’s important to be aware that you would be over the limit if you receive $5,000 in interest on that $100,000 CD. Large companies with accounts at the limit might have instructions to wire interest to another bank to avoid surpassing the FDIC limit, but individual accounts are normally not granted this feature.

If you have joint accounts at the bank, they are also insured up to $200,000 in total. If you are listed as the account’s owner in conjunction with just one other person, such as your husband or wife, then you’re protected for half of the account’s total, up to $100,000, and your joint owner is protected for the other half.

Couples can also set up a trust for children or another relative, insured by the FDIC up to $200,000 per qualifying beneficiary (see FDIC’s explanation). The FDIC also insures retirement accounts held at banks. That includes IRAs, Keogh plans, and self-directed 401(k)s up to a total of $250,000.

Keep in mind that the FDIC does not insure mutual funds, annuities, bonds, or Treasury bills, even if you purchased the investments at an FDIC-insured bank. That doesn’t mean that your money isn’t safe. The Securities Investor Protection Corporation (SIPC) is an organization that protects stocks and bonds from failures in which these assets can become “lost” and from brokers who steal customers’ funds. If your investments simply lose money as many do in the market, the loss is not covered by SIPC.

One thing to watch out for is the difference between “money market accounts” (MMAs) and “money market funds” (MMFs). MMAs are deposit accounts like everyday savings accounts and function similarly. MMAs are eligible for FDIC protection if held at a bank, and they are included in the $100,000 limit with other individual savings accounts. If the MMA is held jointly, it is included in the separate limit for joint accounts. MMFs on the other hand are considered investment products and are not eligible for FDIC protection, even if held at a bank.

Even if you have deposits over the limit of FDIC’s protection, like 10,000 IndyMac customers had when that bank collapsed, the FDIC still does its best to make the excess funds available in a timely manner. In this case, the FDIC provided advances to customers for 50% of their funds deposited over the FDIC limits.

There is always a slight possibility that the entire banking system in the United States could collapse. It’s a very remote possibility, and expecting the worst would be approaching paranoia. But in this highly unlikely situation, even the FDIC might not be able to help you withdraw your funds. It’s always good to keep cash on hand as part of an emergency plan, but taking all of your money out of the banking system would be excessively paranoid.