How Bank Deposits are Protected: SIPC vs FDIC Insurance

After you raise your first checks, through a SAFE, pre-seed, or friends and family round, your first question will likely be “where do I put this”? Of course, you want to keep it safe, so you’ll decide to put it in a bank, but what bank: the bank where you keep your own money, like Chase or Well Fargo, or a bank that’s built for startups?

After you’ve decided on the bank, your account rep will ask you what kind of account you want. Do you want a traditional checking account, a money market account that generates yield, a money market fund that generates more, or all three? After explaining the differences at a high level, they’ll pause and share one of the most important things, whether the account is covered by FDIC or SIPC insurance, but what’s the difference and why does it matter in the first place?

Below we break down the basics of SIPC vs FDIC coverage so you can make a better-informed decision for your startup, let’s dive in!

What is FDIC insurance?

FDIC insurance is offered by the FDIC (a government agency), it protects deposits held in U.S. banks and savings associations in event of a bank failure (default). FDIC insurance covers deposits up to $250,000 per depositor, per insured bank, for each account ownership category. For example, if one depositor has multiple accounts at the same bank, the total amount insured across all the accounts (in the same category is $250k). The FDIC is funded by premiums paid by member banks.

What is SIPC insurance?

SIPC Insurance is offered by the Securities Investor Protection Corporation (SIPC), it protects investors from losses due to the insolvency of a financial institution. SIPC insurance covers up to $500,000 for each depositor at a failed SIPC-member brokerage firm, including a maximum of $250,000 for cash claims. Unlike the FDIC, the SIPC is not a government entity, instead, it is a nonprofit organization that is funded by and run by the member brokerages.

How do FDIC insurance and SIPC insurance work?

Both FDIC insurance and SIPC coverage work in a similar manner—they only kick in if a member bank or institution faces insolvency. FDIC insurance covers depositors up to $250,000 per insured bank, for each account ownership category, while SIPC insurance covers up to $500,000 for each customer of a brokerage firm, including a maximum of $250,000 of cash claims.

If a depositor has more than $250,000 in an account at an FDIC-insured bank or has more than one account of the same type at the same bank, the total covered is still $250,000. The same is true for brokerage accounts, if an individual has more than $500,000 invested with one brokerage, they are only eligible for reimbursement up to the $500k max. It’s also important to note that SIPC insurance does not cover losses due to market fluctuation or the performance of investments.

What are the coverage limits of SIPC and FDIC insurance?

FDIC insurance is limited to $250,000 per depositor, per insured bank, for each account ownership category. This means that if one depositor has multiple deposit accounts of the same type at the same bank, they’re still only insured for $250,000. However, if the same depositor has accounts in the same ownership category at different banks, then they’re insured for $250,000 at each bank.

Like FDIC coverage, SIPC is limited to $500,000 per customer per firm, including a maximum of $250,000 for cash claims. In a similar fashion to the above, if the customer has accounts at multiple firms, then they’re insured for $500,000 at each firm. SIPC insurance does not cover losses due to market fluctuation or the performance of investments.

One important call out: if you intend to open accounts at multiple Fintechs to maximize your FDIC coverage, you’ll want to make sure that they don’t store funds with the same partner bank. If they do, your funds will only be covered up to $250,000 total across all these accounts (assuming they’re in the same ownership category).

Does FDIC and SIPC insurance cover multiple accounts at the same bank or financial institution?

SIPC insurance does not cover multiple accounts at the same financial institution. FDIC insurance on the other hand may cover multiple accounts at the same bank if they have different account ownership categories and each account meets the requirements outlined by the FDIC. The types of account ownership categories include:

• Single Accounts
• Retirement Accounts
• Joint Accounts
• Revocable Trust Accounts
• Irrevocable Trust Accounts
• Employee Benefit Plan Accounts
• Corporation/Partnership/Unincorporated Association Accounts
• Government Accounts

For a more in-depth look at what characteristics an account must have to qualify for a particular category, check out the FDIC’s website.

What are sweep networks and how do they increase FDIC coverage?

Sweep networks enable startups to spread their deposits across an interconnected network of banks, without having to open or manage separate bank accounts at each of the institutions. This enables startups to maximize their FDIC coverage while minimizing the operational workload of keeping track of multiple accounts. Startups who participate in sweep network programs receive significantly more FDIC coverage, 11x more with Arc.

How solvent are the FDIC and SIPC?

The FDIC is a government agency funded by premiums paid by member banks, it has a fund balance of $68.6B and a reserve ratio of 1.37%. The SIPC is a private organization funded by the securities industry, it has a fund balance of $2.6B and a reserve ratio of 1.03%.

While this amount may seem sufficient, it’s important to note that JP Morgan Chase, a member of both the FDIC and SIPC, has over $3T in assets under management just by itself. So in the event, that they become insolvent, the funds would be vaporized almost immediately.

What happens in the event a member bank of the FDIC defaults?

The likelihood of an FDIC-member-bank failing is extremely low, that said, if a default did occur, the FDIC insurance would pay depositors up to the insurance limit, and then the FDIC would begin the liquidation process of collecting the assets of the failed bank and settling its debts, including claims by its depositors for the amount exceeding the $250k limit.

Are all bank and investment accounts FDIC and SIPC insured?

Not all bank and investment accounts are FDIC and SIPC insured. FDIC insurance covers deposits held in member U.S. banks and savings associations, while SIPC insurance covers investments held in a member-brokerage firm.

What kinds of accounts are FDIC insured vs SIPC Insured?

FDIC insurance covers deposits held in U.S. banks and savings associations. Examples of FDIC-insured accounts can include checking accounts, savings accounts, money market accounts, and certificates of deposit (CDs). SIPC insurance, on the other hand, covers investments held in a brokerage firm such as money market funds, mutual funds, government bonds, treasury bills, and other securities.

Are deposits stored with Arc covered by FDIC or SIPC insurance?

Funds held within your Arc Treasury account are safely and securely stored with our FDIC-insured banking partner, Evolve Bank & Trust, making them eligible for $250,000 FDIC coverage. In addition,$2,500,000 of FDIC insurance is available through a money market sweep offered by BNY Mellon Pershing. Arc also provides access to Money Market Funds and government-backed Treasury Bills that are covered by $500K of SIPC insurance. Learn more about Treasury.

Final thoughts on how bank deposits are protected with FDIC and SIPC insurance

FDIC and SIPC insurance are two of the most important sources of downside protection for your idle funds: FDIC covers up to $250,000 in deposits and SIPC covers up to $500,000 in securities. Regardless of where you choose to store your capital, make sure that it is covered by one of these programs, as the last thing you want to happen is the institution you decide to park your funds with goes bust and you’re left holding the bag.