Understanding the FDIC
Overview and History of the Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corp. 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. The agency has other duties, too.
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.
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 the FDIC Helps
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.
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, some joint accounts and retirement accounts could potentially have more than $250,000 in one institution.
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.
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 unions 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.
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
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, life insurance or annuity products, or the contents of a safe deposit box.
How to Confirm 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
In addition to protecting your money, 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 it 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.
One of the ways the FDIC generates revenue is through interest on its investments in U.S. Treasury bonds.
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:
- Bank failures: 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.
- Consumer protection: The FDIC also is 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
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.
Since that time, the FDIC notes that “no depositor has lost a single cent of insured funds as a result of a failure.”
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FDIC. "Selected Sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act." Accessed April 29, 2020.
Federal Deposit Insurance Corp. "Details and Financials—Institution Directory (ID)." Accessed April 29, 2020.
Federal Deposit Insurance Corp. "Insurance Program." Accessed April 29, 2020.
Federal Deposit Insurance Corp. "Failing Bank Acquisitions." Accessed April 29, 2020.
Federal Deposit Insurance Corp. "Consumer Assistance & Information." Accessed April 29, 2020.
Board of Governors of the Federal Reserve System. "Reserve Requirements." Accessed April 29, 2020.
Federal Reserve History. "Bank Holiday of 1933." Accessed April 29, 2020.
Federal Reserve History. "Emergency Banking Act of 1933." Accessed April 29, 2020.
Federal Reserve History. "Banking Act of 1933 (Glass-Steagall)." Accessed April 29, 2020.
Federal Deposit Insurance Corp. "History of the FDIC." Accessed April 29, 2020.