Federal Deposit Insurance Corporation (FDIC)

Limits, Members, Effect on Economy

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

Definition: 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, it is funded by premiums from banks. It also earns interest on its investments in U.S. Treasury bonds.

The FDIC was created by the Banking Act of 1933 to prevent bank failures during the Great Depression. Find out what else the Act did to safeguard banking in What Is the Glass-Steagall Act?

 

Two years later, 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 Bank 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% 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 also insures Certificates of Deposit and money market accounts up to $250,000 per account at each bank. If you save more than $250,000, keep it in a separate bank so it is insured. For more, see How Are My Deposit Accounts Insured by the FDIC?  

However, most people who have that much in savings are using it for retirement. That means they've got to invest it in riskier assets than CDs so they get a higher rate of return.

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.  It only insures the money market accounts and CDs in your IRAs. For more, see  Insured and Uninsured Investments to see what is and is not protected by FDIC insurance.  

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