How are your deposits and investments protected if your bank bankrupts?

1. How is our deposit in the bank protected?

In the United States, our deposits in checking accounts, savings accounts, CD accounts (certificate of deposit), and MMDA (money market deposit account) are insured by the Federal Deposit Insurance Corporation (FDIC), government insurance, which insures up to $250 000 of our money in any bank. If the bank where we hold our deposit fails, FDIC will return our money within 2 business days.

2. How are our investments (stocks, bonds, ETFs, mutual funds) protected if the brokerage company or investment bank, bankrupt?

Our investments (stocks, bonds, ETFs, mutual funds) are not kept in the brokerage company or investment bank through which we purchased our investments. This means that if the brokerage company goes bankrupt, we do not lose the investments we purchased through it.

If I purchase, for example, shares of VOO (ETF made by Vanguard) through a brokerage account in Fidelity, my VOO shares are kept not in Fidelity or Vanguard, but in a 3rd bank, called a custodian bank. Let’s consider several scenarios:

– If Fidelity is bankrupt, my VOO shares are safe in the custodian bank and I will get access to them through a different investment bank (for example through JPMorgan).

– If Vanguard bankrupt, my VOO shares are safe in the custodian bank and will go under the management of a different ETF provider (for example iShares) with a similar ETF (IVV in the case of iShares). The only difference I see in this case is my VOO becomes IVV.

– If the custodian bank bankrupt, my VOO shares will be transferred to a different custodian bank.

– If Fidelity or the custodian bank commits fraud and steals my VOO shares, my VOO shares are insured by SIPC (Securities, Investor Protection Corporation), government insurance, which insures up to $500 000 of my investments (stocks, bonds, mutual funds, ETFs) and up to $250 000 cash in any investment bank.

– Some brokerage companies and investment banks offer additional insurance protection to their clients through such private insurance companies in addition to SIPC.