Uninsured Cash: What I Never Knew

It’s a well-known fact that the Federal Deposit Insurance Corp. (FDIC) insures deposits in banks up to the first $250,000 in any single bank. Any funds on deposit over this amount are considered uninsured and subject to loss if a bank were to go into bankruptcy. These rules apply to commercial bank accounts as well as individual accounts.

This was the extent of my knowledge on cash insured by the FDIC.

While performing a 2012 audit of a commercial client, our team was informed by management that one of their banks had filed for bankruptcy during 2012. They had about $650,000 deposited with the bank at the time of the filing, putting $400,000 of uninsured cash apparently at risk.

It happened that our client had a $1.5 million dollar installment loan outstanding with this same bank at the time of the filing. FDIC regulations allowed the company to “offset” its cash in the bank, both insured and uninsured, with the outstanding loan at the same bank. Since the loan was large enough, it covered all of the company’s deposits, leading to the installment loan being repaid more rapidly than anticipated, but with no loss to the company.

The Federal Deposit Insurance Act (FDI Act) defines “offset” as the adjustment of mutual debts or obligations between two parties in which the debts are allowed to cancel each other up to the amount of the smaller debt. The bank had a debt or obligation to the depositor for the cash on deposit, and the depositor was obligated to the bank for the loan.

The key element is mutuality. Mutuality exists when the debts are between the same two parties. The debts must also be owed in the same right or priority. Under the national depositor preference priority scheme in effect since 1993, a deposit account can be offset against an obligation owed to the institution.

The FDI Act defines “insured deposit” as the net amount due to a depositor. Because of this definition, an offset occurs before the determination of deposit insurance. Thus, in the situation where the depositor/obligor (in this case, my client) may have uninsured funds, the depositor/obligor is allowed to receive “dollar-for-dollar” value for the entire deposit up to the amount of the offset. If my client’s loan had been $400,000, after the offset there would have been net insured funds of $250,000 to be received.

If there is no loan to offset uninsured cash, the depositor gets a receiver’s certificate for the amount of the uninsured cash, and will only receive value to the extent that dividends are paid by the receiver. Loans that are still outstanding after offset represent assets of the bank that a receiver will collect or sell.

The lesson I learned from this is the value of maintaining bank debt at the same bank where you deposit your cash. This will protect cash in excess of $250,000 that may be on deposit at any time. Of course, using larger, stronger banks that are less likely to go bankrupt is also a good idea.

The FDIC Claims Manual, which was the source for this article, contains additional information that might be useful to those with uninsured cash problems.

James M. Sausmer, CPA, is partner and director of quality control with WeiserMazars LLP in Fort Washington. He can be reached at james.sausmer@weisermazars.com.