Federal Deposit Insurance Corporation

Limits, Members, Effect on Economy

woman handing various U.S. dollar bills to a bank teller under glass window
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The FDIC is the Federal Deposit Insurance Corporation. It insures savings, checking and other deposit accounts. Its insurance limit is $250,000 per account ($500,000 per joint account). The FDIC does not insure stocks, bonds, or mutual funds. FDIC insurance prevents widespread bank panics by maintaining confidence in the banking system.

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

KEY TAKEAWAYS 

  • The FDIC insures $250,000 of your bank deposits.
  • Congress created the FDIC in response to the banking crisis of 1933.
  • The FDIC allows depositors to feel secure about placing their money in a savings or checking account.  
  • A bank run occurs when a significant number of depositors quickly withdraw money from their bank accounts. 
  • The FDIC does not insure every kind of banking investment.

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 insures accounts at 8,451 banks. It examines and supervises 4,000 banks. 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 bank's customers don't even notice a change other than the bank's name.

How to Find Member Banks

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. 

The FDIC Was Created by the New Deal

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.

Many banks had invested depositors' funds in the stock market, which crashed in 1929. When depositors' found out, they all rushed to their banks to withdraw their deposits.

Banks are only required to keep 10% of deposits on hand.

Banks lend out the rest at a profitable interest rate. The profit allows them to pay interest on the deposits. During the bank run, they didn't have enough cash to meet depositors' demands. As a result, many closed.

So many banks had closed in 1933 that President Franklin D. 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 the Emergency Banking Act on March 9 to restore confidence before the banks reopened. It laid the groundwork for the FDIC. It allowed the Federal Reserve to issue currency to support bank withdrawals.

The Banking Act of 1935, otherwise known as Glass-Steagall, designated the FDIC as an official government agency. A board of five directors oversees the FDIC. 

How the FDIC Affects the Economy

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 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 nine days. That was 10% of WaMu's deposits. The FDIC closed the bank the following Friday because it didn't have enough cash to conduct day-to-day business. It facilitated WaMu's sale to J.P. Morgan Chase on September 26, 2008, for $1.9 billion. 

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.

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 it does insure the money market accounts and CDs held in your IRAs. 

Article Sources

  1. Federal Deposit Insurance Corporation. "Understanding Deposit Insurance," Accessed Jan. 9, 2020.

  2. Federal Deposit Insurance Corporation. "Press Release," Jan. 29, 2020.

  3. Federal Deposit Insurance Corporation. "JPMorgan Chase Acquires Banking Operations of Washington Mutual," Accessed Jan. 29, 2020.

  4. Federal Deposit Insurance Corporation. "Who Is the FDIC?" Accessed Jan. 29, 2020.

  5. Federal Deposit Insurance Corporation. "BankFind," Accessed Jan. 9, 2020.

  6. Board of Governors of the Federal Reserve System. "Reserve Requirements," Accessed Jan. 29, 2020.

  7. Federal Reserve History. "Emergency Banking Act of 1933," Accessed Jan. 9, 2020.

  8. Federal Reserve History. "Bank Holiday of 1933," Accessed Jan. 9, 2020.

  9. Federal Reserve History. "Emergency Banking Act of 1933," Accessed Jan. 29, 2020.

  10. Federal Reserve History. "Banking Act of 1933 (Glass-Steagall)" Accessed Jan. 29, 2020.

  11. INSEAD. "WaMu: The Mutual Bank that Demutualized and Melted Down," Accessed Jan. 29, 2020.

  12. Federal Deposit Insurance Corporation. "How Are My Deposit Accounts Insured by the FDIC?" Accessed Jan. 9, 2020.

  13. Federal Deposit Insurance Corporation. "Insured or Not Insured?" Accessed Jan. 9, 2020.