Why your money is safe in a bank: A look at BDIC Insurance and what it covers

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Why your money is safe in a bank: A look at BDIC Insurance and what it covers

The failure of Silicon Valley Bank a few weeks ago created plenty of anxiety and it instantly reminded me of the failure of one of our largest insurance providers in Barbados.

If the economy suddenly tanks or our banking system fails, there’s absolutely no reason to head to your bank and withdraw all of your money. It is much safer in a bank than it would be stuffed under your mattress, and that’s because bank deposits up to $25,000 are insured by the BDIC ('Barbados Deposit Insurance Corporation').

What is the BDIC and How Does It Work?

The BDIC insurance is a measure implemented to protect depositors in full or in part, from losses caused by a financial institution's inability to pay its debts when due.

As of December 2022, there were ten (10) members of the Fund. These consisted of six (6) commercial banks, and four (4) deposit-taking non-bank institutions.

How Much Money Does the BDIC Insure?

The BDIC insures up to $25,000 "per depositor, per insured bank, for each account category." Let’s explain some terms. A depositor is a bank customer, and an ownership category is simply the type of account: individual, joint, or trust account.

If you have less than and up to $25,000 on deposit at a single bank or trust and finance company that is insured you are good. But in the event you have more, you should spread your money across different types of accounts as well as add beneficiaries to the accounts you currently have.

Many people fail to do the latter which is a risk in itself.

Let's say you have $75,000, you can deposit $25,000 in three different banks, and since BDIC insurance is $25,000 per insured bank, all of your money is protected.

The BDIC also covers $25,000 for each type of account ownership (individual, joint, or trust), so you could keep your money in the same bank but just put it in three different ownership categories to stay under the $25,000 limit.

Just to advise, if you are thinking of opening accounts at different branches of the same bank or finance and trust companies that won't count. Sorry!

It does not increase your protection.

What Types of Accounts Does BDIC Insurance Cover?

• Chequing accounts
• Saving accounts
• Certificates of deposit (CD)
• Money market deposit accounts

What Types of Accounts Does BDIC Insurance Not Cover?

• Foreign currency deposits
• Letters of credit
• Standby letters of credits
• Interbank deposits
• Stock investments
• Bond investments
• Crypto
• Mutual funds
• Annuities

Let's go through some more examples ??

Scenario A

If you have $10,000 in chequing and $15,000 in savings at the same bank, the combined value of those two accounts is insured up to the initial $25,000.

Scenario B

If you also have a joint account with your spouse/partner at the same bank, you have an additional $25,000 of protection which gives you total coverage of $50,000.

Scenario C

If you have a trust account, the beneficiary of that account is also eligible for $25,000 of coverage.

Scenario D

Conversely, if you have $25,000 at Bank A and $35,000 at Bank B, you are only insured up to $25,000 at Bank B.

How Do You Check if Your Financial Institution is BDIC Insured?

To know if your financial institution is insured, the next time you visit a financial institution, you should see the BDIC certificate physically in the branch. It is a mandatory requirement that the same be displayed.

Adding beneficiaries can increase your insurance protection.

You can have a maximum of two beneficiaries per account at a bank. That means if you were to name two beneficiaries to one account type it would have a maximum of $50,000 in insurance protection per beneficiary, assuming the account owns deposits that qualify for said protection.

What Causes a Bank to Fail?

Banks take our deposits and pay us interest for the right to use our money for financial transactions. They don't keep our money but lend it out to other customers, invest it in securities, and hold some of it in cash for when we make withdrawals.

Now if customers get spooked and withdraw all of their money at the same time. It is not good. There will be a point, where the bank won't have enough cash to pay back its deposits and it will fail.

Banks can also fail because of mismanagement or fraud. Thankfully, our institutions have enough cash in reserve to remain stable in volatile periods.

But What Happens If Your Bank Collapses?

If it does and that's a big if, your money is insured and you shouldn't worry. In the event, you have more than $25,000 a liquidator's certificate is issued to the depositor by the BDIC for the unsecured balance.

Listen, you have enough things to worry about such as the price of eggs and gas. This topic shouldn't be one of them. So don't panic because a safety net has been provided for things such as this.

Till I Write Again,

Your partner in wealth

Marcia

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