payrolls and bankruptcies

If a major bank goes bankrupt, are corporate accounts insured?
Like university payroll accounts?

The answer appears to be: yes, up to $100,000 per TAX ID number.

So... does the FDICs like for moving in on banks on friday afternoons include last friday of the month? And, if so, what happens to payroll accounts?

Large institutions, like universities, need to have large sums transiently in deposit so they can distribute payroll (unless they do it through a line of credit, but corporate lines of credit are getting tightened, payroll may need to be done more through cash).

Global Economic Analysis has an interesting entry
The bottom line seems to be that corporate accounts with cash buffers, like end of month payrolls, are not insured...

Generally speaking academics don't have to worry much about brokering their cash deposits to stay below the FDIC $100,000 limit per individual bank; but universities with payrolls to make do need to worry.

There are other interesting times when an individual depositor may get caught out, in particular during sale and purchase of houses - the payment usually goes through a lawyers escrow account, I don't know if those are exempted and full insured as being effectively trust accounts, or if lawyers need to (self?)insure such escrows.
FWIW my reading is that such accounts are FDIC insured only up to $100,000 and the remainder is the liability of the person who establishes and holds the escrow.
This will burn some real estate lawyers, I wonder how many do diligence on this issue.

An even bigger individual hazard is receiving payment for a house - some of that money will generally go to pay off a mortgage, but there will be a few days where typically over $100,000 is sitting in a single account waiting to be confirmed and the disbursed, and each bank failure, statistically, ought to catch some of those.
Of course this is less likely with fewer house sales. But, maybe time to ask for bags of used $20s and spread them to multiple accounts, eh?
Same with inheritances.

System is more fragile than it appears, no wonder the powers that be are terrified of a cascade of major bank failures.

Caveat: I am of course neither a lawyer nor an accountant.
Corrections welcomed.

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IINM the payroll payments from my university to employees with direct deposit happen on Friday mornings. If this is typical, it may be one reason FDIC waits until after lunch to act, to minimize the potential damage to innocent third parties.

Another relevant question is what about the various accounts held by the university for specific business purposes, including such things as Federal grant money. Some of those accounts may have more than $100k at certain times (particularly the tuition receivables account, although certain NASA hardware project accounts may also be in this category), and certainly the aggregate totals way more than $100k. Would your Federal funding be frozen temporarily if FDIC take over your university's bank?

IANAL (or an A) either, so these are not rhetorical questions.

By Eric Lund (not verified) on 22 Jul 2008 #permalink

The only relevant item I was aware of is what a title officer told me happened to her once. Her office received a certified check from the buyer for the price, closed escrow and recorded the deed. The bank on which the check was drawn failed in the interim and the title company was, at least temporarily, stuck for the money. This was,however, a number of years ago.

By Joe Cooper (not verified) on 22 Jul 2008 #permalink

I was a banker in Dallas in the late 1980's when the Dallas banks failed. A fellow employee went to a settlement and accepted a cashier's check for hundreds of thousands of dollars on a Friday morning. Sat a.m. the paper said the bank that issued it had failed. His check was worth only $100,000 plus some cents on the dollar determined later.

MORAL OF THESE STORIES - DON'T ACCEPT CASHIERS CHECKS OVER $100,000 - INSIST ON WIRE TRANSFERS!

By Texn Embsd by Bush (not verified) on 22 Jul 2008 #permalink

Well, if you get a cashiers check you can at least take it somewhere else if YOUR bank fails during the transaction... problem can exist at both ends.

I am baffled by the question of Universities holding pooled federal research funds.
One might hope it'd be covered by the "held in trust" exemption on the insurance limit, but I can't find any discussion of whether they are.

Be "interesting" to file a progress report if that happened.
Not to mention explaining it to the postdoc/grad student whose salary was being held.

I've made enquires - anyone know for sure?

Years ago, I worked for a small college in Boston. Our payroll checks were drawn on the Bank of New England. There were persistent rumors around Massachusetts that year that the Bank of New England was going to fail (times were not so good, bad real estate loans, George Bush was president ... it's like Groundhog Day). It got to the point where the college president felt compelled to write us all a memo saying that the Bank of New England account was just a payroll account and not to worry, the college's funds were distributed in many places, not sitting in a deposit account at Bank of N.E. Nevertheless, a month later they changed it to an account at State Street Bank and Trust.

The next year, I was walking down the street in Philly and saw a headline in a newspaper box: "Bank of New England Fails."

So I don't have an informed answer for you, other than a guess that you will hear rumors before major bank failures. It's happened before.

However, in at least some significant bank failures, the FDIC has reimbursed accounts above the $100K limit, either fully or at 50 cents/dollar. The rationale appears to be similar to "too big to fail." Sometimes, this has caused problems: if the FDIC reimburses accounts for some banks but not others, there are questions of fairness. When they reimbursed accounts at Bank of New England fully but initially refused to reimburse above $100K for Freedom Bank of Harlem, a lot of people cried foul, with some justification: http://www.time.com/time/magazine/article/0,9171,972188-1,00.html

History, doomed to repeat, etc.

Informal advice I got so far is that pooled federal funds are pulled from the fed side as expenditures go through on the university side, with little or no money ever sitting on the university side.
Looking to hear more on this, just to be sure.

Maybe universities are also smart enough to use credit lines for payroll and cover the draw same day from investment accounts.
Then the only vulnerability for cash operations is whether money market funds go negative on principal.