What is the FDIC?

Overview and History of the Federal Deposit Insurance Corporation

FDIC refers to the Federal Deposit Insurance Corporation, a government agency designed to protect consumers. The FDIC is best known for deposit insurance, which helps you avoid losing money if your bank fails, but the agency has other duties as well.

Deposit Insurance

When you put money in the bank, you generally assume it’s safe. Why? It’s hard for somebody to steal it, it won’t go up in smoke if your house burns down, and you can trust the bank to keep track of everything (usually).

However, sometimes banks are not as safe as we think, and that’s why FDIC insurance is important.

FDIC insurance allows you to get your money back from a failed bank. If an insured bank fails -- or runs out of money -- the FDIC will step in and pay any funds that you are due (up to certain limits, generally $250,000 per account holder). The goal of FDIC insurance is to promote trust in the banking system; if your deposits are FDIC insured, the US government stands behind the promise to make you whole.

For more details, see How FDIC Insurance Works. It is essential that you understand what is (and is not) covered by FDIC insurance. Note that FDIC insurance only applies to bank accounts, but credit unions have something very similar: NCUSIF insurance.

Funding Deposit Insurance

When a bank fails and the FDIC pays account holders at that bank, where does the money come from? The FDIC runs an insurance fund, which is a giant pool of money that can be used to cover bank losses.

The money in that fund comes from “premiums” paid by FDIC insured banks. Those institutions pay into the fund in case they fail someday -- and to help pay for other banks that fail.

The FDIC insurance fund is not funded with taxpayer dollars. All of the money comes from insured banks (and earnings on the assets in that fund).

However, FDIC insurance is generally considered “government guaranteed,” and most people assume that the US Treasury would step in if the FDIC insurance fund were to run out of money.

Other Activities

In addition to insuring bank deposits, the FDIC oversees activities at many (but not all) banks and thrift institutions. Oversight, of course, is intended to promote a safe banking environment where bank failures are less likely to occur. When banks do fail, the FDIC is involved with the cleanup. The agency usually finds another bank to take over the failed institution’s deposits and loans.

The FDIC is also concerned with consumer protection, so the agency monitors banks to make sure they follow consumer-friendly laws. In general terms, the FDIC wants consumers to feel confident about the banking system.

Brief History of the FDIC

The FDIC was created as a result of thousands of bank failures in the 1920s and 1930s. In those failures, bank customers lost staggering sums of money -- if you didn’t get your cash out before the bank went under, you were out of luck. From time to time, individual states attempted to insure deposits, but none of those programs survived.

Amid chaos and fear about continuing bank failures, the Banking Act of 1933 created the FDIC as a temporary measure to restore order (signed into law by President Franklin D. Roosevelt). Bank failures and bank runs quickly declined, suggesting that FDIC insurance helped to bolster confidence in the banking system. The FDIC was initially funded by the US Treasury with $289 million; that funding was repaid to the Treasury in 1948.

The Banking Act of 1935 made the FDIC a permanent agency and refined how the organization works (for example, funded by banks instead of by the US Treasury). Since that time, the FDIC notes that “no depositor has lost a single cent of insured funds as a result of a failure.”