Federal Deposit Insurance Corporation is an independent U.S. government agency that was created to protect the financial system of the United States. The FDIC’s deposit protection is its most well-known feature. It helps to protect customers’ deposits in the event of a bank failure.
What you need to understand about the FDIC, its funding, and why it exists.
What is the FDIC?
Federal Deposit Insurance Corporation (FDIC) is a federal agency that helps promote a healthy U.S. financial system. This independent federal agency hopes that by performing this type of oversight and supervision it will increase trust in the financial system.
Note:
FDIC insurance means that your money will be there for you when you need it.
How does the FDIC work?
You probably think that the money you deposit in a bank is secure. The money won’t disappear if your home burns down. It won’t get stolen by someone who steals your wallet. Banks have backup plans and security systems that are nearly impossible to defeat. Your deposits are safe because the FDIC ensures that they are.
Protecting Your Investments
When you deposit money in a bank, it doesn’t sit there. It is invested to earn revenue. Banks use deposits to generate revenue. This is how they pay out interest on saving accounts, certificates ( CDs) and other products. These investments include stocks, loans to customers, and other investment types.
Banks invest conservatively. However, any investment could lose money. Some banks are more comfortable with taking risks than others. When a bank loses too much money on its investments, it may not be able to meet the needs of the customers who have deposited their money at the bank. The FDIC will step in if the has failed.
Insurance Against Bank Failure
The FDIC will provide cash if your bank fails and is unable to return your deposits. You will still receive your money, even if the bank is no longer in business.
From the consumer’s perspective, there are limitations to FDIC coverage. FDIC insurance generally covers up $250,000 per account per institution. Some joint accounts, retirement accounts, and other types of accounts may be insured for more than $250,000. You can maintain multiple accounts at different institutions to increase your insured deposit.
Note:
During the 2008 financial crisis, the FDIC temporarily raised this limit to $250,000 per account ($500,000 for joint accounts). During the 2008 financial crises, the FDIC temporarily increased the limit to $250,000.
What is covered (and what isn’t?)
FDIC Insurance provides some security to American families. However, it does not cover all the funds in the American financial system. Understanding what is and what isn’t insured can be very helpful. FDIC Insurance only applies to bank accounts at member financial institutions.
FDIC only covers “deposits products” including:
- Savings and checking accounts
- Time deposits, like CDs
- Official payments issued by covered bank, including money orders and cashier’s check
Note:
Credit unions have a nearly identical government-guaranteed form of protection through the National Credit Union Administration (NCUA) under the name of the National Credit Union Share Insurance Fund. This insurance is the same as FDIC, but it covers deposit accounts at credit unions rather than banks.
The FDIC and NCUA do not cover many of the financial products or investment products listed above. Securities in your investment or retirement accounts, such as stocks and bonds, mutual funds, ETFs, life insurance, annuities, or contents of a safety deposit box, are not covered by the FDIC or NCUA.
How to confirm a bank’s FDIC status
You can quickly and easily check if a bank is FDIC insured by using the search function available on the FDIC website. If the bank is insured by the FDIC, you can search for it using information such as its name, location and web address. Insured banks should also have the FDIC logo displayed on their front door, as well as elsewhere within the bank.
You can get the FDIC certificate numbers from each FDIC-insured institution by simply asking. This number will help you find the FDIC’s website faster.
Deposit Insurance Funding
FDIC insurance premiums are funded by the insured banks. The banks that receive insurance pay a premium. It is similar to auto and home insurance. The premiums are also based on the riskiness of a bank. 2 This prevents a single bank from abusing this system by taking unwarranted risks in the hope that another bank will take care of their mess. FDIC insurance costs increase as a bank’s risk level increases.
FDIC Insurance is “backed up by the full credit and faith of the U.S. government” even though it is funded through premiums. government. ” 3 It is assumed that the U.S. Treasury will step in to help if the FDIC Insurance Fund runs out of funds, but this scenario hasn’t been tested as of September 2019.
What else does the FDIC do?
The FDIC also supervises the activities of many banks and thrifts. This oversight is designed to create a banking environment that promotes a safe and secure banking system.
The FDIC does not just protect the deposits of customers when a bank fails. When a bank fails, the FDIC coordinates the cleanup by finding another institution to take over any remaining loans and deposits.
Most bank failures for customers are not a big deal, thanks to the FDIC. Customers are unlikely to experience any major disruptions while acquisitions and transfers take place in the background. You may need to open a new bank account if the bank is no longer in business.
FDIC provides oversight of consumer protection, conducts consumer education and responds to consumer complaints. It also examines banks for compliance with federal laws. These efforts aim to inspire further confidence in the banking industry.
Notable Events
The FDIC was established by the Glass Steagall Act in 1933. The goal of the FDIC was to prevent bank failures in the Great Depression. Customers rushed into their banks after the 1929 stock market crash to withdraw their deposit. This sudden surge in withdrawals destabilized an already fragile financial industry. Banks that invested most of their funds on the stock market began to fail. The banks were unable to return the deposits of their customers, and Americans lost faith in them.
Franklin D. Roosevelt declared an official bank holiday in 1933 to calm the panic. In just 36 hours, on March 6, he shut down all U.S. Banks. 5 Congress also drafted the Emergency Banking Act during this time, which established the FDIC and allowed the Federal Reserve the ability to issue currency in support of bank withdrawals.
The FDIC reports that since its founding in 1933 “no depositor ever lost a single penny of their insured deposits.” 6
The Key Takeaways
- Federal Deposit Insurance Corporation is an independent agency which protects and promotes the rights of consumers.
- The FDIC was established during the Great Depression to boost confidence in the financial sector.
- The FDIC generally covers up to $250,000 of each account.
