FDIC Consumer News Summer 2002

If an insured bank or savings institution fails, the FDIC arranges for payment of deposit insurance as soon as possible, typically within a few days, either through a transfer of deposits or a direct payout. But as some investors have found, if you make a deposit through a broker and not directly with a bank, and the bank fails, it can take the FDIC longer to send an FDIC insurance payment. Here's why:

The failed institution's records often do not show the names of the individuals who made deposits through the broker. "The bank's records may simply indicate that the deposit was placed by a broker as custodian for one or more clients or investors," says Debra Foster, an FDIC insurance claims specialist. "The broker must then submit information to the FDIC documenting who owns the account; until we receive that documentation, deposit insurance cannot be paid."

In many cases, brokers will buy one CD (certificate of deposit) perhaps totaling millions of dollars, using smaller deposits from many clients. If the bank fails, each investor's share of that large CD can qualify for up to $100,000 of FDIC coverage, but the FDIC must obtain from the broker the names and deposit amounts for each customer.

"Until that information is received, the FDIC cannot determine the appropriate insurance coverage," says Martin Becker, a senior specialist with the FDIC division that handles insurance claims. Adds FDIC attorney Christopher Hencke, "Investors in brokered CDs need to realize that we must rely on the broker to give us the information we need to make a prompt insurance payment."

Also part of the equation: After the FDIC receives all the information from a broker, the FDIC must determine whether each customer had other accounts at the failed bank and, if so, whether the combined funds exceed the insurance limit.

Let's say, for example, a bank is offering extremely attractive interest rates, and you use one broker to invest $50,000 there, a different broker to invest another $50,000 at the same bank, and you decide on your own to place $50,000 in that bank without using a broker. Before paying your insurance claim, the FDIC must cross check the deposit records. In this case, assuming all three accounts were in the same ownership category for FDIC insurance purposes, your $150,000 in deposits would be covered for only $100,000, including any interest you may have earned. Your remaining balance of $50,000, as well as any accrued interest, would be uninsured.

As previously reported in FDIC Consumer News, brokers sometimes can negotiate a higher interest rate on a bank-issued CD. However, CDs sold by brokers also often involve terms and conditions that you do not commonly see with traditional deposits sold directly by banks, and these terms and conditions may carry more risks than traditional bank CDs. For more information, see our Fall 2000 edition posted on the FDIC Web site at www.fdic.gov/consumers/consumer/news/cnfall00/.