7 ms·

It looks like both FDIC and SIPC have a 250K protection, are there any other differences between the two that would matter to an average consumer?

robraven 8y ago
Does this mean it's not smart to store more than 250k in robinhood? (I don't, just wondering)
- deleted 8y ago
  [deleted]
- 1123581321 8y ago
  You shouldn’t store more than $250k in cash in any kind of bank or brokerage due to the insurance limit (unless the bank has account insurance beyond $250k.) Investments are different, of course. Edit: I forgot about the details of the limit. Thank you all.
  - dec0dedab0de 8y ago
    EDIT: According to the link shared by mortenjorck this is incorrect. A banker explained this to me a while ago, and I just took their word for it. I might have to call my mom now. I'll leave this up so that anyone else with the same misconception will know its wrong It's actually per bank, per type of account. So $250k in savings accounts, $250k in checking, $250 in Money Market, etc.
    - mortenjorck 8y ago
      This is incorrect according to the FDIC’s website: > All single accounts owned by the same person at the same bank are added together and insured up to $250,000 Revocable trusts, joint accounts, and other types of accounts with multiple custodians are covered separately, but checking, savings, and so on are not. https://www.fdic.gov/deposit/covered/categories.html https://www.fdic.gov/deposit/covered/categories.html
    - dragonwriter 8y ago
      > It's actually per bank, per type of account. So $250k in savings accounts, $250k in checking, $250 in Money Market, etc. It's not per type of account, it's per ownership category. Ownership categories are: (1) Single accounts (2) Certain self-directed retirement accounts (3) Joint accounts (4) Revocable trust accounts (5) Irrevocable trust accounts (6) Employee benefit (non-self-directed) plan accounts (7) Corporation, partnership, or unicorporated association account (8) Government accounts https://www.fdic.gov/deposit/covered/categories.html https://www.fdic.gov/deposit/covered/categories.html With a little bit of work, you can probably spread your money into a few of those categories without much problem and have more than $250k coverage, but it's not as easy as just having checking and savings.
  - bogomipz 8y ago
    The limit is actually per each ownership category: https://www.fdic.gov/deposit/covered/categories.html https://www.fdic.gov/deposit/covered/categories.html
  - Schweigi 8y ago
    Interactive Brokers introduced a Bank Deposit Sweep Program this year. They distribute cash over 10 banks to provide up to $2.5mio FDIC insurance.
    - whitepoplar 8y ago
      Same with Fidelity's free CMA account.
  - notyourday 8y ago
    Per bank per beneficiary with John Smith POD Jane Smith account being considered different beneficiary than John Smith account.
- ptero 8y ago
  Brokerages love fat cats and most provide free high quality additional insurance up to at least 5-10M. What happens if brokerage fails? My bet is its insurance, reinsurance or gov't would bail investors out (ask Lehman clients many of whom had accounts a LOT bigger than 250k). My guess is that it is safe to keep at least 5M in a single brokerage, but decide for yourself.
  - crgt 8y ago
    Many Lehman clients got pennies on the dollar..
    - ptero 8y ago
      Can you provide some references? This is an honest question, I am just stunned that this did not cause major account fragmentation (fat cats splitting millions into 500k chunks). Just googling (which, granted, is not truth) seems to point to major news outlets confirming that customer accounts were safe. To clarify, I am talking about customers who held money at LB invested in mutual funds or securities. If the account had a mix M of securities before LB collapsed they would have the same mix once the dust settled and LB account was forced to whatever other brokerage. If this is incorrect (not for some advanced hedge funds, etc. but for retail customers) I would love to know. If you are talking about folks who held LB stock or bonds, they sure did lose money when the company went bankrupt, but that is not unexpected. Stocks fluctuate in price and some go all the way to zero; for every Google there are a few KMarts, Sears or Enrons.
  - jonwachob91 8y ago
    Do you have any links or reading material about what lehman clients were able to pull out?
    - ptero 8y ago
      This came after a quick search, which seems to confirm that if a client had, say, 100 shares of Amazon in a brokerage account at LB he would still have those: a brokerage must separate retail customers investments in other securities from its own money and funds. https://www.kiplinger.com/article/investing/T023-C000-S001-what-happens-to-lehman-s-customers.html https://www.kiplinger.com/article/investing/T023-C000-S001-w... However, reading more I am not as sure that individual investors holding money in LB investing in other (non-LB) securities did not suffer. I am not an expert and cannot always distinguish between reputable sources and conspiracy theorists. Can someone provide some good references?
ptero 8y ago
IANAL, but I doubt FDIC vs SIPC matters for an average consumer. If either fails it would almost certainly cause a major run on banks and/or a systemic money transfers failure. Thus it is much cheaper for the gov't to print more money than suffer such consequences. And if the gov't really wanted to weasel out of FDIC there are plenty of loopholes. For example, I think FDIC can take a long time (up to 10 years?) to pay and is not adjusted for inflation, so inflate, wait and pay pre-inflate amounts is an option (stupid, but technically possible).
siftikha 8y ago
SIPC covers 500k in (non-exempt) assets with a max of 250k of those assets as cash.
snowwrestler 8y ago
Maybe: > SIPC insurance provides protection for your cash balance and securities holdings if Robinhood fails financially, but does not cover investment losses due to declines in the value of securities themselves. Emphasis mine. If you put $250,000 into an FDIC-protected checking account, that account holds cash and FDIC protects the full amount of that cash. If you put $250,000 in an SIPC-protected brokerage account, that account holds both cash and securities, and SIPC does not protect you from a decline in the market value of those securities. So imagine the stock market drops and you go to your "checking account" and that has dropped too! To me, the concept of such a "checking account" violates my basic assumptions of how I think about my cash holdings vs. my security holdings. I don't know how that percentage of cash/securities breaks down at Robinhood, but it's not going to be 100% cash and 0% securities. There is a reason big banks don't offer checking accounts with 3% interest rates. When the return is higher, the risk must have gone up too, somehow. It also seems like there could be weird tax implications if your "checking account" has to liquidate securities to cover a big check you wrote.
- mcv 8y ago
  What are securities in this context? Is that not something that you personally choose to invest in? Because if it is, then this is basically the same. Your cash is fully insured, but obviously your investments run investment risk. If Robinhood automatically converts your money into securities, then it's a different matter. It sounds unlikely to me that any bank account would work that way, but I don't know how Robinhood works.
  - 09bjb 8y ago
    Not an expert in this domain but I'll cover the basics: ecurities are a euphemism for stocks and similar. Banks have been loaning out the money you deposit since the beginning of time; it's how they make money. They don't keep all the cash that people have deposited on hand, which is why a "run on the bank" was problematic in the past. They basically keep enough cash around ("reserves") so that the average withdrawals don't get them into trouble. And yes, you are certainly not choosing the investments that the bank makes with your money. And they're not "your" investments: the bank pays you a small fee (3% in this case) and then takes risks with your money to make a higher return and keep the difference. I'd recommend reading up on the Federal Reserve (The Creature from Jekyll Island), the modern financial system (any of Michael Lewis's books, especially Boomerang and The Big Short), and maybe the first global banking families (The Medicis: Power, Money, and Ambition in the Italian Renaissance). We're talking about the power structure of the world here and it's good to be informed on the main points.
nitsuaeekcm 8y ago
Banks who petition the Fed for FDIC insurance face much stricter reporting rules, capital reserve requirements, and limits on the riskiness investments they can make with client deposits from FINRA and the SEC. If you wanted, you could view the lack of FDIC insurance as a sign of a riskier institution overall, but like any other investment it might be worth it for the higher rate.
- arminiusreturns 8y ago
  Just FYI, AFAIK, the standard 10 percent fractional reserve rate is no longer law after legislation post 08 crash bankers slipped through. So that old rule is very often not the case at a bank anymore.
cjensen 8y ago
The FDIC is part of the government and the government owns a printing press. You WILL get your money back. No private insurance company can provide such guarantees and keep then if the entire sector needs to be bailed out at the same time.
- hn_throwaway_99 8y ago
  I don't understand this. SIPC is a federally-mandated corporation, not a private insurance company.
  - cjensen 8y ago
    Right. They don't have the same level of commitment from the US government. SIPC is like Fannie Mae, where the US implies a backing without making a promise. When push comes to shove the US Government gets to choose whether to do a bailout on a case-by-case basis. FDIC is not like that at all. The US explicitly and unconditionally backs them. Look at it in political terms. FDIC is guaranteeing everyone's savings, rich or poor. You just can't let that fail. SIPC is guaranteeing a bunch of investments. If the class in power takes a dim view of bailing out a bunch of "wealthy speculators", the ball can definitely be dropped.

robraven 8y ago

Does this mean it's not smart to store more than 250k in robinhood? (I don't, just wondering)

deleted 8y ago
[deleted]
1123581321 8y ago
You shouldn’t store more than $250k in cash in any kind of bank or brokerage due to the insurance limit (unless the bank has account insurance beyond $250k.) Investments are different, of course. Edit: I forgot about the details of the limit. Thank you all.
- dec0dedab0de 8y ago
  EDIT: According to the link shared by mortenjorck this is incorrect. A banker explained this to me a while ago, and I just took their word for it. I might have to call my mom now. I'll leave this up so that anyone else with the same misconception will know its wrong It's actually per bank, per type of account. So $250k in savings accounts, $250k in checking, $250 in Money Market, etc.
  - mortenjorck 8y ago
    This is incorrect according to the FDIC’s website: > All single accounts owned by the same person at the same bank are added together and insured up to $250,000 Revocable trusts, joint accounts, and other types of accounts with multiple custodians are covered separately, but checking, savings, and so on are not. https://www.fdic.gov/deposit/covered/categories.html https://www.fdic.gov/deposit/covered/categories.html
  - dragonwriter 8y ago
    > It's actually per bank, per type of account. So $250k in savings accounts, $250k in checking, $250 in Money Market, etc. It's not per type of account, it's per ownership category. Ownership categories are: (1) Single accounts (2) Certain self-directed retirement accounts (3) Joint accounts (4) Revocable trust accounts (5) Irrevocable trust accounts (6) Employee benefit (non-self-directed) plan accounts (7) Corporation, partnership, or unicorporated association account (8) Government accounts https://www.fdic.gov/deposit/covered/categories.html https://www.fdic.gov/deposit/covered/categories.html With a little bit of work, you can probably spread your money into a few of those categories without much problem and have more than $250k coverage, but it's not as easy as just having checking and savings.
- bogomipz 8y ago
  The limit is actually per each ownership category: https://www.fdic.gov/deposit/covered/categories.html https://www.fdic.gov/deposit/covered/categories.html
- Schweigi 8y ago
  Interactive Brokers introduced a Bank Deposit Sweep Program this year. They distribute cash over 10 banks to provide up to $2.5mio FDIC insurance.
  - whitepoplar 8y ago
    Same with Fidelity's free CMA account.
- notyourday 8y ago
  Per bank per beneficiary with John Smith POD Jane Smith account being considered different beneficiary than John Smith account.
ptero 8y ago
Brokerages love fat cats and most provide free high quality additional insurance up to at least 5-10M. What happens if brokerage fails? My bet is its insurance, reinsurance or gov't would bail investors out (ask Lehman clients many of whom had accounts a LOT bigger than 250k). My guess is that it is safe to keep at least 5M in a single brokerage, but decide for yourself.
- crgt 8y ago
  Many Lehman clients got pennies on the dollar..
  - ptero 8y ago
    Can you provide some references? This is an honest question, I am just stunned that this did not cause major account fragmentation (fat cats splitting millions into 500k chunks). Just googling (which, granted, is not truth) seems to point to major news outlets confirming that customer accounts were safe. To clarify, I am talking about customers who held money at LB invested in mutual funds or securities. If the account had a mix M of securities before LB collapsed they would have the same mix once the dust settled and LB account was forced to whatever other brokerage. If this is incorrect (not for some advanced hedge funds, etc. but for retail customers) I would love to know. If you are talking about folks who held LB stock or bonds, they sure did lose money when the company went bankrupt, but that is not unexpected. Stocks fluctuate in price and some go all the way to zero; for every Google there are a few KMarts, Sears or Enrons.
- jonwachob91 8y ago
  Do you have any links or reading material about what lehman clients were able to pull out?
  - ptero 8y ago
    This came after a quick search, which seems to confirm that if a client had, say, 100 shares of Amazon in a brokerage account at LB he would still have those: a brokerage must separate retail customers investments in other securities from its own money and funds. https://www.kiplinger.com/article/investing/T023-C000-S001-what-happens-to-lehman-s-customers.html https://www.kiplinger.com/article/investing/T023-C000-S001-w... However, reading more I am not as sure that individual investors holding money in LB investing in other (non-LB) securities did not suffer. I am not an expert and cannot always distinguish between reputable sources and conspiracy theorists. Can someone provide some good references?

ptero 8y ago

IANAL, but I doubt FDIC vs SIPC matters for an average consumer. If either fails it would almost certainly cause a major run on banks and/or a systemic money transfers failure. Thus it is much cheaper for the gov't to print more money than suffer such consequences. And if the gov't really wanted to weasel out of FDIC there are plenty of loopholes. For example, I think FDIC can take a long time (up to 10 years?) to pay and is not adjusted for inflation, so inflate, wait and pay pre-inflate amounts is an option (stupid, but technically possible).

siftikha 8y ago

SIPC covers 500k in (non-exempt) assets with a max of 250k of those assets as cash.

snowwrestler 8y ago

Maybe: > SIPC insurance provides protection for your cash balance and securities holdings if Robinhood fails financially, but does not cover investment losses due to declines in the value of securities themselves. Emphasis mine. If you put $250,000 into an FDIC-protected checking account, that account holds cash and FDIC protects the full amount of that cash. If you put $250,000 in an SIPC-protected brokerage account, that account holds both cash and securities, and SIPC does not protect you from a decline in the market value of those securities. So imagine the stock market drops and you go to your "checking account" and that has dropped too! To me, the concept of such a "checking account" violates my basic assumptions of how I think about my cash holdings vs. my security holdings. I don't know how that percentage of cash/securities breaks down at Robinhood, but it's not going to be 100% cash and 0% securities. There is a reason big banks don't offer checking accounts with 3% interest rates. When the return is higher, the risk must have gone up too, somehow. It also seems like there could be weird tax implications if your "checking account" has to liquidate securities to cover a big check you wrote.

mcv 8y ago
What are securities in this context? Is that not something that you personally choose to invest in? Because if it is, then this is basically the same. Your cash is fully insured, but obviously your investments run investment risk. If Robinhood automatically converts your money into securities, then it's a different matter. It sounds unlikely to me that any bank account would work that way, but I don't know how Robinhood works.
- 09bjb 8y ago
  Not an expert in this domain but I'll cover the basics: ecurities are a euphemism for stocks and similar. Banks have been loaning out the money you deposit since the beginning of time; it's how they make money. They don't keep all the cash that people have deposited on hand, which is why a "run on the bank" was problematic in the past. They basically keep enough cash around ("reserves") so that the average withdrawals don't get them into trouble. And yes, you are certainly not choosing the investments that the bank makes with your money. And they're not "your" investments: the bank pays you a small fee (3% in this case) and then takes risks with your money to make a higher return and keep the difference. I'd recommend reading up on the Federal Reserve (The Creature from Jekyll Island), the modern financial system (any of Michael Lewis's books, especially Boomerang and The Big Short), and maybe the first global banking families (The Medicis: Power, Money, and Ambition in the Italian Renaissance). We're talking about the power structure of the world here and it's good to be informed on the main points.

nitsuaeekcm 8y ago

Banks who petition the Fed for FDIC insurance face much stricter reporting rules, capital reserve requirements, and limits on the riskiness investments they can make with client deposits from FINRA and the SEC. If you wanted, you could view the lack of FDIC insurance as a sign of a riskier institution overall, but like any other investment it might be worth it for the higher rate.

arminiusreturns 8y ago
Just FYI, AFAIK, the standard 10 percent fractional reserve rate is no longer law after legislation post 08 crash bankers slipped through. So that old rule is very often not the case at a bank anymore.

cjensen 8y ago

The FDIC is part of the government and the government owns a printing press. You WILL get your money back. No private insurance company can provide such guarantees and keep then if the entire sector needs to be bailed out at the same time.

hn_throwaway_99 8y ago
I don't understand this. SIPC is a federally-mandated corporation, not a private insurance company.
- cjensen 8y ago
  Right. They don't have the same level of commitment from the US government. SIPC is like Fannie Mae, where the US implies a backing without making a promise. When push comes to shove the US Government gets to choose whether to do a bailout on a case-by-case basis. FDIC is not like that at all. The US explicitly and unconditionally backs them. Look at it in political terms. FDIC is guaranteeing everyone's savings, rich or poor. You just can't let that fail. SIPC is guaranteeing a bunch of investments. If the class in power takes a dim view of bailing out a bunch of "wealthy speculators", the ball can definitely be dropped.