The Too Safe to Fail Bank Account: A U.S. Idea That China's Importing

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For 80 years, American depositors have been able to bank on the fact that if their bank ever failed, the U.S. government would have their back.

We've known this ever since President Franklin D. Roosevelt signed the Banking Act of 1933 into law, establishing "FDIC insurance" for bank deposits of $2,500 or less -- a blanket guarantee that if your bank ever fails, the government will make us whole on what was in our accounts, up to some specified limit. (Currently, it's $250,000.)

But what's true here is not true everywhere.

In Europe, for example, there is no FDIC-like guarantee -- a fact that greatly complicated matters in the recent bank crisis in Cyprus. China's another place that has no depositor guarantee, but that could soon change.

Building a Chinese Wall Against Bank Runs

Last week, the People's Bank of China -- the nation's central bank -- announced that "the timing is basically right to roll out a deposit-insurance system" in China. And not just in theory. The PBC says it's currently working on a plan, and "will set up a system as soon as possible."

What kind of plan? Good question. Evidently, the PBC is still working that out. But just asking the question gives us an excuse to take another look at the system we have now here in the U.S. -- a system that changed dramatically in response to the 2008 financial crisis, and the bank run it very nearly caused.

Home Rules: How Your Money's Protected in America

Here are the basic rules for FDIC insurance, pulled directly from the FDIC's website:
FDIC Deposit Insurance Coverage Limits
by Account Ownership Category
Single Accounts
owned by one person
$250,000 per owner
Joint Accounts
owned by two or more persons
$250,000 per co-owner
Certain Retirement Accounts
includes IRAs
$250,000 per owner
Revocable Trust Accounts $250,000 per owner per beneficiary up to 5 beneficiaries (more coverage available with 6 or more beneficiaries subject to specific conditions and requirements)
Corporation, Partnership, and Unincorporated Association Accounts $250,000 per corporation, partnership or unincorporated association
Irrevocable Trust Accounts $250,000 for the non-contingent, ascertainable interest of each beneficiary
Employee Benefit Plan Accounts $250,000 for the non-contingent, ascertainable interest of each plan participant
Government Accounts $250,000 per official custodian (more coverage available subject to specific conditions)

Right off the bat, you can see that the operative number here is "$250,000." As in, if you've got a bank account, but have less than a quarter of a million dollars piled into it, you're pretty much golden. No worries. If the economy tanks, if your bank fails, the government will happily send you enough money to make you whole.

2.5 Times Safer Than in 2008

Probably the best news of all is that depositors today no longer have to live with the uncertainty of this $250,000 limit reverting back to the mere $100,000 per account that the FDIC insured prior to the recent crisis.

Hiking the limit to $250,000 was initially just a temporary measure instituted as part of the fiscal scramble to save the economy back in 2008. But Congress made the new $250,000 limit permanent in July 2010 -- and so far as we know, that's the way it's going to stay until the next time it rises.

Now, if you have the "problem" of owning a bank account with "too much" cash in it, first, you have our sympathies. Life's tough. But second -- you still probably don't have to worry much.

If, for example, you're a standard married couple with kids, you can stick $250,000 in the husband's account, $250,000 more in the wife's, and $250,000 more in a joint account.

If you need still more room, you could stash some cash in a retirement account or two, open trust accounts for the kids, or maybe rent a self-storage locker. Or, judging from the news out of China, in a few months you can try opening a bank account in Hong Kong.

We'd remind you to make sure to notify the IRS of that foreign account -- if you don't, they'll probably find out about it anyway.

Motley Fool contributor Rich Smith wonders if the IRS makes up these silly "Put 250k here, put 250k more there" rules just to ensure full employment for ex-IRS tax accountants for when they retire to private practice.



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