If you have a bank account – or even if not – you’ve likely heard of FDIC insurance. FDIC insurance is deposit insurance overseen by the Federal Deposit Insurance Corporation, a federal entity created by the Banking Act of 1933.
FDIC insurance guarantees the safety of deposits in checking, savings, and CD accounts held with FDIC member banks. When a member bank fails, the FDIC reimburses each depositor up to $250,000 per account. As of mid-2015, there are about 6,400 FDIC member banks, according to the FDIC.
Origins & History of the Depositors Insurance Fund (DIF)
The FDIC doesn’t run the United States’ only deposit insurance scheme. The Depositors Insurance Fund (DIF) is a lesser-known, less-widespread scheme that provides supplemental protection for funds deposited with Massachusetts-chartered savings banks. Savings banks primarily accept savings deposits and use those funds to issue mortgages, personal loans, business credit, and other types of credit vehicles.
However, they often administer checking accounts as well. Many smaller community banks are structured as savings banks. DIF membership is compulsory – if your bank is structured as a savings bank and based in Massachusetts, your deposits are covered by DIF insurance.
DIF isn’t to be confused with the Deposit Insurance Fund, which is the fund the FDIC uses to reimburse account holder deposits lost due to member bank failures.
Today, DIF protects all Massachusetts-chartered savings bank deposits that aren’t protected by FDIC insurance, which is any amount deposited in excess of the FDIC’s $250,000 per account limit. According to DIF, “The combination of FDIC and DIF insurance provides customers of Massachusetts-chartered savings banks with full deposit insurance on all their deposit accounts. No depositor has ever lost a penny in a bank insured by both the FDIC and the DIF.”
With DIF, there’s no maximum insured amount per account – depositors’ funds theoretically enjoy unlimited protections. However, as most banks impose maximum deposit limits – typically ranging from $1 million to $10 million per account – there’s a practical upper limit to DIF coverage.
Put another way, the FDIC and DIF combine forces to provide Massachusetts-chartered banks’ depositors with the country’s most robust deposit insurance protections. During major downturns, such as the late 1980s/early 1990s savings and loan crisis (when 19 Massachusetts banks failed) and the late 2000s financial crisis, DIF was more than adequate to cover depositors’ losses.
In 1932, after a spate of Massachusetts-chartered bank failures, the Massachusetts state legislature voted to create the Mutual Savings Central Fund (MSCF), DIF’s predecessor. A concurrent act of the legislature created the Co-operative Central Bank, which provided deposit insurance for account holders with credit unions and cooperative banks based in Massachusetts.
As the United States’ first state-sanctioned deposit insurance fund, MSCF was designed to provide full deposit protection for individual and business depositors with failed member banks. After the creation of the FDIC, which initially reimbursed deposits up to $5,000, MSCF’s charter was modified to cover deposits above and beyond the FDIC’s coverage limit. It’s unclear when MSCF changed its name to DIF.
Key Features of DIF Insurance Coverage
- Location and Residency. DIF insurance only covers deposits with Massachusetts-chartered savings banks. If your savings bank is chartered in Connecticut or New Hampshire, DIF can’t help you. However, DIF doesn’t impose any residency restrictions. If you live in Connecticut, New Hampshire, or any other state, your Massachusetts-chartered savings bank deposits are protected – an important consideration if you do business with an online bank based in Massachusetts. Also, DIF insurance covers deposits made at any member bank branch, even if that branch is located outside of Massachusetts. So if you live in New Hampshire, for example, and do business with a Massachusetts-based bank that operates a branch in your hometown, your deposits are protected.
- No Added Cost. DIF insurance is free for all depositors. You don’t need to pay any fees or surcharges to benefit from the program.
- No Application Requirements. Like FDIC insurance, DIF insurance automatically covers all new depositors from the moment they open an account with a member bank. You don’t have to fill out an application to participate in the program or provide any information beyond what’s necessary to open the account.
- No Coverage for Investment Products. Like FDIC insurance, DIF insurance doesn’t cover investments in mutual funds, annuities, equities, bonds or other investment products. Only deposit accounts – usually checking, savings, CDs, and money markets – are covered.
DIF Members, Funding, Assets & Oversight
DIF membership is subject to change as banks start, fail, or change their charter location. According to Depositors Insurance Fund, as of mid-2015, DIF members include the following:
Funding Mechanisms & Investments
Though DIF’s predecessor was created by a legislative act, the modern organization operates as a private organization funded by its member banks. Each DIF member is required to contribute an annual assessment, or payment, to the general fund. Each member’s assessment is based on the total value of its customers’ deposits. According to DIF’s 2014 annual report, the fund took in a total of $2.04 million in assessments during the 2014 fiscal year. Individual member banks’ assessments aren’t disclosed.
DIF invests assessed funds in three main classes of securities: short- and long-term U.S. treasuries, debt obligations issued by U.S. government-sponsored enterprises (federally-created financial services corporations, such as Fannie Mae and Freddie Mac), and privately issued mortgage- and asset-backed securities. DIF invests the bulk of its assets in obligations guaranteed by the Federal Government.
Since the value of and proceeds from these securities can change (and DIF’s expenses fluctuate depending on a variety of factors), the fund’s net income isn’t constant from year to year. For instance, according to its 2014 annual report, DIF’s net 2013 income came to $2.53 million. Its 2014 net income amounted to $2.46 million.
DIF’s total balance – including cash, cash equivalents, and securities – came to about $374.71 million in 2013 and $376.19 million in 2014. By comparison, its insured excess deposits (depositors’ funds insured above the FDIC limit) amounted to $10.1 billion in 2013 and $11.39 billion in 2014. In other words, DIF was able to cover 3.77% of depositors’ excess funds in 2013 and 3.31% of excess funds in 2014.
Supervision & Member Oversight
DIF is overseen by the Massachusetts Division of Banks, a state regulatory authority. By law, it must also submit to independent audits by a private, third-party auditor. On a day-to-day basis, it’s run by a president and executive team. The executive team periodically reports to a 13-member board comprised of executives from DIF member banks, major employers with a sizable presence in Massachusetts (such as IBM), and Massachusetts-based public agencies (such as MBTA, the Boston area’s transit authority).
DIF doesn’t have the authority to independently examine its member banks’ finances. However, it does require each bank to submit a quarterly financial statement. It also works with the Massachusetts Division of Banks, the FDIC, and the Federal Reserve, all of which have legal authority to audit banks based in Massachusetts. DIF relies on reports from these entities to definitively determine whether a member bank is in danger of failing or becoming unable to repay its obligations.
In the event that a failure appears imminent, DIF records an expected liability on its balance sheet. If and when a member bank fails, DIF steps in if necessary and as required by law to reimburse depositors for any funds lost above the FDIC insurance limit. A bankrupt member bank’s membership generally lapses if it’s purchased out of bankruptcy by another DIF member or otherwise recapitalized. Regardless of its solvency, a DIF member also loses its membership when its assets are purchased by a non-DIF member bank (in other words, a bank headquartered outside Massachusetts) and it subsequently abandons its Massachusetts charter.
Massachusetts is home to nearly 7 million people, or roughly 2% of the American population. Most Americans have never lived in the Bay State, and many have never even set foot in it. But that doesn’t mean DIF insurance is of no import to residents of, say, Texas or California.
For one thing, Americans are mobile. Even if you have no interest in moving to Massachusetts, you could find yourself compelled by an employer or some unforeseen life circumstances to do so in the future. In the midst of trying to find the right town or neighborhood for your family, you’re likely to find yourself looking for a local bank that protects deposits with DIF insurance.
Alternatively, you could find yourself weighing the best checking account or savings account options from one of the many online banks headquartered in Massachusetts, all of which offer DIF insurance in addition to FDIC insurance. Or, you could live in a state that borders Massachusetts, where Bay State banks are more likely to have satellite branches.
And, if you’re interested in public policy or the legislative process, you could even hold up DIF insurance as a model for more robust deposit account protections in your home state. After all, both DIF and FDIC insurance – critical consumer protections taken for granted today – were unheard of before the 1930s.
Are your bank deposits covered by DIF insurance?