Federal Deposit Insurance Corporation

Limits, Members, Effect on Economy

FDIC insurance protection
••• The FDIC protects your bank savings up to a certain level. Photo: Getty Images

The FDIC is the Federal Deposit Insurance Corporation. It is an independent agency of the federal government. The U.S. Congress does not appropriate funds. Instead, the FDIC is funded by premiums from banks. It also earns interest on its investments in U.S. Treasury bonds.

The FDIC was created by the 1933 Glass-Steagall Act. Its goal was to prevent bank failures during the Great Depression.  A few bank failures had snowballed into a banking panic.

Depositors demanded their money back. Even sound banks usually only keep one-tenth of their deposits on hand. They lend out the rest at a profitable interest rate. The profit allows them to pay interest on the deposits. Most of the time, banks only need to keep 10 percent on hand to keep their depositors' happy. In a bank run, they must quickly find the cash. When they couldn't, they failed.

So many banks had closed that President Roosevelt declared a bank holiday to stop the panic. On March 6, three days after taking office, he closed all U.S. banks.  Congress passed Glass-Steagall on March 9 to restore confidence before the banks reopened. When they reopened, they only gave depositors 10 cents for each dollar. Where did the money go? Many banks had invested in the stock market, which crashed in 1929. When depositors' found out, they all rushed to their banks to withdraw their deposits.

 Today, we don't have to worry about bank runs because the FDIC insures all deposits. Since people know they will get their money back, they usually don't panic and create a bank run. The exception was when Washington Mutual closed in 2008. Depositors created a bank run because they didn't think they were protected by the FDIC.

The Banking Act of 1935 designated the FDIC as an official government agency.  A board of five directors oversees the FDIC. 

What the FDIC Does

The FDIC insures savings, checking and other deposit accounts. It does not insure stocks, bonds, or mutual funds. During the 2008 financial crisis, the FDIC temporarily raised the upper limit to $250,000 per account ($500,000 per joint account). In 2010, the Dodd-Frank Wall Street Reform Act made the new limit permanent.

The FDIC also examines and supervises about 5,250 banks, more than half of the total system. When a bank fails, the FDIC immediately steps in. It usually sells the bank to another one and transfers the depositors to the purchasing bank. Most of the time, the transition is seamless from the customer's point of view.

How to Find Member Banks

The FDIC insures more than 6,300 banks (as of September 10, 2015). These banks held $15.8 billion in assets and nearly $12 billion in deposits. To find member banks, enter your city and state or zip code, at the FDIC BankFind website. Most major banks, such as Bank of America, JPMorgan Chase, and Wells Fargo, are insured.  You can also enter your bank's information to find out if it is insured.

The Federal Reserve Banking System requires all its member banks to be FDIC-insured. 

How the FDIC Affects the Economy

FDIC insurance prevents widespread bank panics by maintaining confidence in the banking system.

The stock market crash of 1929 drove some banks out of business. Depositors at those banks lost all their savings. Depositors at other banks panicked. When they withdrew their deposits, their banks went out of business. People stuffed their money under their mattresses.  That took more money out of circulation and further deepened the Depression. 

The FDIC reassures depositors that they won't lose their life savings if a bank fails. By preventing bank panics, the FDIC helps prevent another Great Depression.

Surprisingly, FDIC insurance did not stop a bank run on Washington Mutual. When Lehman Brothers declared bankruptcy in September 2008.

WaMu's panicked depositors withdrew $16.7 billion from their accounts in just ten days. That was 10 percent of WaMu's deposits.  The FDIC closed the bank the bank the next Friday because it didn't have enough cash to conduct day-to-day business. J.P. Morgan Chase bought WaMu on September 26, 2008, for $1.9 billion. For more, see How WaMU Went Bankrupt.

How It Protects Your Savings

The FDIC insures Certificates of Deposit and money market accounts up to $250,000 per account at each bank. For some joint accounts, the FDIC insures $250,000 per owner. It applies to some retirement accounts, joint deposit accounts, and trust accounts.

If you save more than $250,000, keep it in a separate bank so it is insured. But most people who have that much in savings are using it for retirement. In that case, you'd need to invest it in riskier assets than CDs so they get a higher rate of return. Retirement savings need to outpace inflation. Stocks have historically been the best way to do that.

The FDIC does not insure securities or mutual funds even if offered by a bank. It also doesn't protect the value of life insurance policies, annuities, or municipal bonds.  That means most of the holdings in your retirement accounts are not insured.  But its does insures the money market accounts and CDs held in your IRAs.