Sure, let’s break down this banking jargon into everyday language.
So, you’ve probably heard of FDIC insurance, right? It’s a safety net for your money in the bank. The Federal Deposit Insurance Corporation, or FDIC, is a government agency that was set up back in 1933. If your bank, which is a member of the FDIC, goes under, the FDIC will give you back up to $250,000 per account. As of 2023, there are around 4,800 banks that are members of the FDIC.
But the FDIC isn’t the only game in town. There’s also something called the Depositors Insurance Fund, or DIF. This is a bit more niche, as it only applies to savings banks in Massachusetts. Don’t mix up this DIF with the Deposit Insurance Fund, which is the pot of money the FDIC uses to pay back depositors when a bank fails.
Now, what’s a savings bank? These banks mainly take in savings deposits and use that money to give out loans for things like houses, personal needs, and businesses. They also often offer checking accounts. Many smaller, local banks are set up as savings banks. If your bank is a savings bank in Massachusetts, it has to be a member of DIF.
A bank that’s part of the Massachusetts DIF is any savings bank in Massachusetts. The DIF covers any deposits that the FDIC doesn’t cover, which means any money over the FDIC’s $250,000 limit per account. The FDIC and DIF work together to give depositors at Massachusetts-chartered banks the best deposit insurance protection in the country. Even during big financial crises, like the savings and loan crisis in the late 80s and early 90s and the financial crisis in the late 2000s, the DIF was able to cover all the depositors’ losses.
With the DIF, there’s no maximum amount that’s insured per account. Your money is theoretically protected without limit. However, most banks do have a maximum deposit limit, usually between $1 million and $10 million per account, so there’s a practical limit to DIF coverage.
The Massachusetts DIF started in 1932, after a bunch of Massachusetts-chartered banks failed. The state legislature voted to create the Mutual Savings Central Fund, which was the DIF’s predecessor. This was the first state-sanctioned deposit insurance fund in the US, and it was designed to fully protect the deposits of individuals and businesses if their bank failed. After the FDIC was created, the Mutual Savings Central Fund’s charter was changed to cover deposits over the FDIC’s coverage limit. It’s not clear when the name was changed to DIF.
The DIF has some key benefits and restrictions for banking customers in Massachusetts. It only covers deposits with Massachusetts-chartered savings banks. But it doesn’t matter where you live. If you live in another state but your savings bank is chartered in Massachusetts, your deposits are protected. This is a big deal if you do business with an online bank based in Massachusetts. DIF insurance also covers deposits made at any member bank branch, even if that branch is outside of Massachusetts.
DIF insurance is free for all depositors. You don’t have to pay any fees or surcharges to benefit from the program. Like FDIC insurance, DIF insurance automatically covers all new depositors from the moment they open an account with a member bank. You don’t have to fill out an application or provide any extra information to participate in the program. But, like FDIC insurance, DIF insurance doesn’t cover investments in things like mutual funds, annuities, stocks, bonds, or other investment products. Only deposit accounts, like checking, savings, CDs, and money market accounts, are covered.
The DIF is a private organization funded by its member banks. Each member bank has to contribute an annual payment to the general fund, based on the total value of its customers’ deposits. The DIF invests these funds in things like U.S. treasuries, debt obligations issued by U.S. government-sponsored enterprises, and privately issued mortgage- and asset-backed securities. The bulk of its assets are invested in obligations guaranteed by the Federal Government.
The DIF is overseen by the Massachusetts Division of Banks, a state regulatory authority. It also has to submit to independent audits by a private, third-party auditor. It’s run by a president and executive team, who report to a 13-member board made up of executives from DIF member banks and other major employers in Massachusetts.
If a DIF member bank looks like it’s going to fail, the DIF records an expected liability on its balance sheet. If the bank does fail, the DIF steps in if necessary to reimburse depositors for any funds lost above the FDIC insurance limit. If a DIF member bank goes bankrupt and is bought by another DIF member or recapitalized, its membership generally lapses. A DIF member also loses its membership if its assets are bought by a non-DIF member bank and it gives up its Massachusetts charter.
Even if you don’t live in Massachusetts, DIF insurance could still be important to you. You might move to Massachusetts for work or other reasons. Or you might do business with an online bank based in Massachusetts, which would offer DIF insurance in addition to FDIC insurance. Or you might live in a state that borders Massachusetts, where banks from the Bay State are more likely to have branches. And if you’re interested in public policy or the legislative process, you might want to use DIF insurance as a model for stronger deposit account protections in your home state. After all, both DIF and FDIC insurance, which are critical consumer protections we take for granted today, were unheard of before the 1930s.
