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Deposit Insurance Fund (DIF): Protecting Deposits in Addition to FDIC Insurance – in Massachusetts

Learn how the Deposit Insurance Fund (DIF) works in conjunction with deposit insurance from the FDIC to protect depositors at certain Massachusetts banks.

You’re probably aware that funds you have on deposit at any bank in America are covered against bank default by FDIC for up to $250,000 per depositor. But what happens if you have more than $250,000 on deposit with a single bank?

If you live in the state of Massachusetts, you may be in luck.

There’s a little-known bank deposit insurance agency called the Depositors Insurance Fund, or simply known as the DIF.

It provides a similar function to FDIC, except it covers deposits that exceed the $250,000 FDIC limit.

Only a relatively small number of banks participate in the DIF program, but if you bank with one of them, your deposits won’t be limited to insurance coverage of $250,000.

There is some degree of understandable confusion as to what DIF is, because DIF also stands for Deposit Insurance Fund, which is the funding source for insurance claims paid to depositors through the FDIC when a bank fails.

Let’s take a look at both versions of the DIF – the Massachusetts Depositors Insurance Fund, and the FDIC Deposit Insurance Fund.

What is the Depositors Insurance Fund?

Available only to depositors of select Massachusetts banks, the Depositors Insurance Fund is relatively unknown.

To the surprise of many:

It has been insuring deposits since 1934 and it works in conjunction with the FDIC.

The Depositors Insurance Fund is a private, industry- sponsored insurance company backed neither by the US government nor by the Commonwealth of Massachusetts.

Purpose

The basic purpose of the DIF is to provide insurance coverage on bank deposits in excess of the $250,000 per depositor limit provided by the FDIC.

However, while all banks in Massachusetts are required to participate in FDIC, not all are part of the Massachusetts DIF.

Only select banks participate, and they do so by contributing to a dedicated insurance pool for the DIF. That provides those banks with an opportunity to accept deposits in excess of $250,000 that will still be fully insured against bank default.

Since all DIF banks are also participating FDIC members, the first $250,000 in a depositor’s account will be covered by FDIC insurance.

Only the amount of the depositor’s balance exceeding $250,000 will be covered by DIF insurance.

When a depositor makes a deposit into a DIF member bank, there is no additional application to fill out, nor are there any extra fees that need to be paid.

Just as is the case with FDIC insurance, DIF coverage is similarly invisible to the depositor.

As of October 31, 2019, the DIF had funds available of nearly $398 million, insuring deposits of over $16.3 billion.

This gave the fund a coverage ratio – funds available divided by insured excess deposits – of 2.43%.

Now:

That may seem low, but it’s above the 2% ratio that is generally considered necessary to insure excess deposits under severe financial circumstances.

As DIF/FDIC literature confirms, no depositor has ever lost money in an account insured by DIF/FDIC.

Deposits covered by the DIF

Deposits covered by DIF are similar to those covered by FDIC. You must have your funds on deposit with a participating DIF bank to enjoy the coverage.

If the bank is a participating member, your deposits will be covered without exception.

That includes checking, savings, NOW accounts, money markets, certificates of deposit, and retirement accounts.

Any financial securities held through a participating bank are not covered by either insurance program. FDIC and DIF coverage are limited strictly to bank deposits.

If you have an investment account with a participating bank that includes stocks, bonds, mutual funds, annuities or other securities, they will not be covered by either FDIC or DIF insurance.

Top 10 Banks that participate in the DIF

In total, there are 49 banks participating in the DIF -- with most being located in Massachusetts.

The 10 largest participating banks include the following:

  1. East Boston Savings Bank
  2. Salem Five Bank
  3. Middlesex Savings Bank
  4. Cape Cod Five Cents Savings Bank
  5. North Easton Savings Bank
  6. Bay Coast Bank
  7. PeoplesBank
  8. Bristol County Savings Bank
  9. South Shore Bank
  10. Cambridge Savings Bank

Bank failure: The process for deposits covered by the DIF and FDIC

If you have funds on deposit with a participating Massachusetts bank, and that institution fails, there are no special steps you’ll need to take to file a claim for your money.

The insurance applies automatically, much as is the case when FDIC intervenes in a bank failure.

You will not be required to complete any special applications or go through any additional procedures.

But while there’s no official limit on how much of a consumer’s deposits can be covered by the DIF, many banks do impose a limit.

That can be anywhere from $1 million to as much as $10 million.

Residency is important

Even though the fund has been established to cover banks located in Massachusetts, you don’t need to be a resident of the Commonwealth for your deposits to be covered.

You can live in a neighboring state – or any other state – and your deposits will be covered as long as they are held in a participating bank.

Just as important, the protection is free to all depositors.

What is the Deposit Insurance Fund?

Not to be confused with the Depositors Insurance Fund, The Deposit Insurance Fund is part of the FDIC. As discussed earlier, FDIC protects depositors for up to $250,000 per depositor, per bank.

Virtually all banks in the United States are members of the FDIC, making your money safe wherever it’s held on deposit, as long as it doesn’t exceed the stated limits.

But where the FDIC is concerned, the Depositors Insurance Fund is the account that holds the funds distributed to depositors following a bank failure. The funds are paid out of the DIF, which is funded through premiums paid by participating banks.

The premium varies based on both the amount of deposits held by a bank, as well as the level of risk the bank is determined to present to the FDIC.

FDIC also requires banks to maintain minimum reserve requirements.

These are funds each banking institution must maintain on hand to have available for the withdrawal of customer deposits. The reserve requirement was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The law set the minimum Designated Reserve Ratio (DRR) of 1.35%. This is the minimum level of funds each participating bank must maintain on hand. For example, if a bank has $1 billion in customer deposits, it must have at least $13.5 million on hand at all times.

However, since 2011 the DRR has been 2% of all deposits. A $1 billion bank would then be required to have $20 million on hand at all times.

In the event the amount of funds that need to be covered in a banking crisis exceeds the DIF balance, FDIC can get additional funds from the US Treasury.

Much like the Depositors Insurance Fund in Massachusetts, FDIC and the Deposit Insurance Fund are invisible to bank customers.

Though most depositors are aware that that FDIC is part of the banking mix – especially given that banks are required to display FDIC membership in their buildings and in their advertising – the agency is mostly invisible unless the particular bank becomes insolvent, or a general banking crisis develops.

Conclusion

If you’re confused about the difference between the Depositors Insurance Fund operating in the state of Massachusetts, and the Deposit Insurance Fund that forms the insurance fund for the FDIC, you have every right to be.

But with either agency, awareness would only be on a limited basis anyway.

In the case of the Depositors Insurance Fund, you would only need to know about it if each of the three apply:

  1. You’re a resident of Massachusetts
  2. You have funds in one of the 49 banks participating in the state DIF fund
  3. You have in excess of $250,000 in any one bank

But with the Deposit Insurance Fund from the FDIC, you’ll never know it exists at all.

And that’s a sign that the insurance funds are doing their job.

We’re able to hold money on deposit with banks, not be concerned with losing it in a bank failure, and it all happens completely out of sight.