Financial Meltdowns, NonProfits & the FDIC

by Kate Lee

October 30, 2008

B uried deep in this New York Times article is a lesson for nonprofits. The info is buried at the end of page one of the article; it details how a number of organizations lost their funds when a bank was declared insolvent. With the failure and takeover of other banks, including Washington Mutual, will there be more nonprofits impacted by the F.D.I.C rules?

In the midst of the financial crisis, little attention has been paid to the impact on nonprofit organizations.  Beyond the drop-off in donations or the increased demand for services is the unfortunate truth: nonprofits receive no preferential treatment when the Federal Deposit Insurance Corporation (F.D.I.C.) comes to town.

Like individual depositors with their basic checking and savings accounts, nonprofits are protected only to the extent of the current F.D.I.C. insured amounts.  Before Congress passed the Financial Bailout – or Rescue, depending on your political view – this was limited to $100,000 per owner.  The amount is now $250,000 per account, through December 31, 2009. The definition of “owner” is based on the account’s titling – for example, an account for Mr. John Smith would be considered as an owner, while the joint account of Mr. and Mrs. John Smith would be another owner.

Some nonprofits hold multiple accounts but were titled so consistently as to be considered as one owner.  For those unlucky enough to bank with a failed bank – such as Freedom National Bank, or any number of others – amounts over $100,000 are uninsured and at risk.   In the past years, nonprofits have welcomed the high interest rates paid on their deposits – consolidating accounts at one institution in order to maximize the interest income. 

The F.D.I.C. is able to transfer the assets or otherwise recoup value from the failed bank, those nonprofit account owners may get back some of the amounts beyond that $100,000 amount.  No guarantees, naturally.

I pose this question: if, as a society, we value the services provided by nonprofit organizations, why do we not insist that these organizations receive a preferential treatment in the face of bank failures?  Should such organizations’ funds be fully insured, regardless of amount?