Understanding the FDIC
Overview and History of the Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) is a government agency designed to protect consumers and the U.S. financial system. The FDIC is best known for deposit insurance, which helps customers avoid losses when a bank fails, but the agency has other duties as well.
When you deposit funds with a bank, you probably assume the money is safe. It’s hard for somebody to steal it, it won’t be destroyed if your house burns down, and banks have security systems and backup plans that are virtually impossible for any individual to overcome.
However, banks invest deposits to earn revenue, which explains how your bank pays interest on savings accounts, certificates of deposit (CDs), and other products. Those investments include loans to other customers and other, more complex investments.
Banks typically invest conservatively, but any investment can lose money. If a bank’s investments lose too much, the institution may be unable to satisfy the demands of customers who want to use the money they have deposited at the bank. When that happens, the bank fails.
How FDIC Helps
FDIC insurance allows you to get your money after a bank failure. If an insured bank fails or runs out of money, the FDIC steps in and pays any funds you are due. However, it’s essential to verify that your funds are in an insured bank and that your deposits are below FDIC limits.
The FDIC generally covers up to $250,000 per account holder per institution. However, depending on how your accounts are titled, it may be possible to have more than $250,000 in one institution. For some, joint accounts and retirement accounts can potentially result in more coverage.
The goal of FDIC insurance is to promote trust in the banking system. When your deposits are FDIC-insured, the U.S. government stands behind the promise to make you whole.
What is Covered?
Not all funds in the financial system are covered by FDIC insurance. FDIC insurance applies only to bank accounts held at member financial institutions. Credit union banks have a similar government-guaranteed form of protection through the National Credit Union Administration (NCUA) under the name of the National Credit Union Share Insurance Fund (NCUSIF).
FDIC insurance protects “deposit products” only, including:
- Checking and savings accounts
- Time deposits, like CDs
- Official payments issued by covered banks, including cashier’s checks and money orders
- Money market accounts
While the items listed above have coverage there are many products that do not receive protection from the FDIC or the NCUA. These include securities you may hold in an investment or retirement account such as stocks, bonds, mutual funds, and exchange-traded funds. Money market accounts are not covered. Nor are life insurance or annuity products or the contents of a safe deposit box.
Confirming a Bank's FDIC Status
If you are shopping around for a bank and want to be sure it is FDIC-insured, the quickest and easiest way is to go to the FDIC's search feature on its website. Enter the name of the bank, its location, its web address, and other pertinent information, and it should show up in the search if it is insured. Banks that are insured also should have the FDIC logo on its front door and elsewhere in the bank. Each bank also has an FDIC certificate number, which you should be able to get from the bank simply by asking for it. That number can expedite your search on the FDIC website.
Funding Deposit Insurance
The FDIC runs an insurance fund. Like any insurance fund, this generates a large pool of money that can be used to cover bank losses. All of that money comes from insured banks and earnings that the fund generates. Taxpayer dollars do not go into the fund, although the FDIC could potentially fall back on taxpayer support in a worst-case scenario.
To provide funding, FDIC-insured banks pay premiums into the fund. With numerous banks paying premiums, the cost of bank failures is shared and spread out over time. That situation can create a hazard by tempting banks to take risks, knowing that other banks will clean up the mess. In recognition of this risk, regulated banks have to meet certain criteria to be FDIC-insured.
Although the insurance fund is self-funded, FDIC insurance is usually considered “government guaranteed.” The assumption is that the U.S. Treasury would step in if the FDIC insurance fund were to run out of money.
FDIC Oversight Activities
In addition to insuring bank deposits, the FDIC oversees activities at many banks and thrift institutions. That oversight is intended to promote a safe banking environment where bank failures are less likely to occur.
When banks do fail, the FDIC gets involved. The agency coordinates the cleanup by finding another bank to take over the failed institution’s deposits and loans. For most customers, bank failures are relatively uneventful—largely due to the FDIC. Customers can typically count on their money being there, and they often continue using the same checks and payment cards.
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. To accomplish this, the FDIC provides consumer education, responds to complaints, and examines banks to ensure that they’re following federal laws.
Brief History of the FDIC
The FDIC was created as a result of thousands of bank failures in the 1920s and 1930s. In those events, 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. The act was signed into law by President Franklin D. Roosevelt. Bank failures and runs on banks quickly declined, suggesting that FDIC insurance helped to bolster confidence in the banking system. The FDIC initially was funded by the U.S. Treasury with $289 million, and 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, the insurance funds come from banks instead of the U.S. Treasury. Since that time, the FDIC notes that “no depositor has lost a single cent of insured funds as a result of a failure.”