Although every business is different, banks are businesses like other businesses. Some businesses buy and sell cars, and other businesses sell services. Banks can be thought of as buying and selling the use of money.
Like other businesses, banks typically have owners. Those owners are usually shareholders, and sometimes the shares of banks are traded publicly.
As with any shareholder in a business, if the business is disrupted or fails, the shareholders can lose their investment in the ownership of shares. In other words, the shares can become less valuable or worthless. Thus, if someone has money invested in shares of a bank, that money is not guaranteed or insured and can be lost.
However, banks are unique from other businesses in that the stock in trade of banks is money. Obviously, money is an essential tool that allows our free-market economy to function.
If a bank cannot return depositors’ money when the depositors are legally permitted to have the their money returned, the lack of that essential tool (money) to our economy can cause a chain reaction that can cause the entire free market entire economy to collapse, which was an attribute of the Great Depression.
It is for this reason that the federal government set up a system of universal insurance for depositors in banks, which is managed by the FDIC. FDIC insurance is funded by participating banks who pay the premiums for the insurance, which then protects depositors’ money in the bank and makes depositors “whole” if the bank cannot satisfy the depositors’ demands for the timely return of money.
Thus, if someone has money invested in a bank’s shares, that money is not protected by the FDIC and is at risk for loss. However, if someone is doing business with the bank such that the bank is using that person’s money (and usually paying interest for that right to use the person’s money), that person doing business with the bank has FDIC insurance to protect that money.
For example, people who are on TV or social media claiming that they lost large amounts of money due to a recent bank failure were likely shareholders in the bank. If those people were depositors in the bank, FDIC insurance could have possibly protected those people’s money.
FDIC insurance, like all insurance, has limits. There are several account categories, including single accounts, revocable trust accounts and entity accounts. The FDIC insurance provides protection of up to $250,000 per person, per account category, per participating bank.
People who may have more than $250,000 in a certain account category at one bank sometimes worry about exceeding the limit.
However, there is usually no need for alarm. Almost all banks use various computerized systems that adjust each person’s account balance per category per bank to below $250,000 each night and facilitates corresponding, reciprocal investments in other banks. This computer system allows a person to work with one bank but have the FDIC protection that would be provided if the person worked with several banks.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at [email protected] or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.