FDIC Definition and Examples
The Federal Deposit Insurance Corporation (FDIC) is an independent agency established by the United States government to protect consumers in the United States' financial system. The FDIC is best known for deposit insurance, which protects customer deposits in the event that a bank fails.
Here's what you need to know about the FDIC's role in protecting you, how it's funded, and why it was established.
What Exactly Is the FDIC?
The Federal Deposit Insurance Corporation is one organization that works to maintain a healthy financial system in the United States. Its responsibilities include deposit insurance and oversight of major financial institutions. This independent federal agency hopes to increase trust in the banking system by conducting this oversight and supervision.
Important: When your deposits are FDIC-insured, the United States government guarantees that the money you deposit will be available when you need it.
How Does the FDIC Operate?
When you deposit money in a bank, you probably believe it is safe. It won't be destroyed if your house burns down, it won't be taken by a thief who robs your wallet, and banks have backup plans and security measures that are nearly impossible for anyone to breach. The FDIC is in charge of ensuring that your deposits are as safe as you believe.
Defending Your Investments
When you deposit money into a bank account, the cash does not simply sit in a vault somewhere. Banks invest deposits to generate revenue, which is how they pay interest on savings accounts, CDs, and other products. Loans to other customers, stocks, and a variety of other investments are examples of these investments.
Banks typically invest cautiously, but any investment can lose money, and some banks are more willing to take risks than others. If a bank's investments lose too much money, the institution may be unable to meet the needs of customers who want to withdraw money from the bank. The bank is declared insolvent when this occurs, and the FDIC steps in.
Protecting Against Bank Failure
If your bank fails and is unable to return your cash deposits, the FDIC will do so in its place. In other words, even if your bank goes out of business, you will still receive the funds in your account.
From the consumer's perspective, the only catch is that FDIC insurance has limits. Generally, each institution's FDIC coverage for each account holder is limited to a maximum of $250,000. Nevertheless, some joint accounts and retirement accounts might have at least $250,000 in insurance at a single institution. You can also maintain accounts with multiple institutions to increase your insured deposits.
It's worth noting that FDIC insurance limits used to be set at $100,000. The FDIC then temporarily increased the limit to $250,000 per account ($500,000 per joint account) during the 2008 financial crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 made the $250,000 limit permanent.
What's Included (and What Isn't)?
For American families, the FDIC insurance offers a great deal of security, but it does not cover all the money in the financial system. It's critical to understand what's covered and what isn't. The FDIC insures only bank accounts held at member financial institutions.
FDIC insurance only covers "deposit products," which include:
- Accounts for checking and savings
- Time deposits, such as CDs
- Cashier's checks and money orders are examples of official payments issued by covered banks.
Credit unions have nearly identical government-guaranteed protection through the National Credit Union Administration (NCUA), known as the National Credit Union Share Insurance Fund. This type of insurance covers the same deposit accounts as FDIC insurance but at credit unions rather than banks.
While the items listed above are covered, many financial and investment products are not covered by the FDIC or the NCUA. Securities such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), life insurance or annuity products, or the contents of a safe deposit box fall into this category.
How to Verify the FDIC Status of a Bank
If you're looking for a new bank and want to make sure it's FDIC-insured, the quickest and easiest way is to use the FDIC's website search feature. If the bank is FDIC-insured, enter information such as its name, location, and web address, and it should appear in the search. Insured banks should also display the FDIC logo on their front door and elsewhere in the building.
Every FDIC-insured bank has an FDIC certificate number, which you should be able to obtain simply by asking the bank. This number can help you find information faster on the FDIC's website.
Deposit Insurance for Funding
The insured banks pay for FDIC insurance. It works similarly to auto or home insurance in that the banks are receiving insurance and pay a premium for their coverage. Another similarity to other types of insurance is that the bank's riskiness determines the premiums charged. This prevents any single bank from abusing the system or taking unnecessary risks in the hope that other banks will clean up their mess if they fail. The more risks a bank takes, the more FDIC insurance it must pay.
FDIC insurance is "backed by the full faith and credit of the United States government," even though it is self-funded through premiums.
The assumption is that the US Treasury would step in if the FDIC insurance fund ran out of funds, but this scenario had not been tested as of September 2020.
What Does the FDIC Do Else?
In addition to insuring bank deposits, the FDIC monitors the operations of numerous banks and thrift institutions. This supervision is intended to foster a safe banking environment in which bank failures are less likely.
When a bank fails, the FDIC does more than protect customer deposits. The agency coordinates the failed institution's cleanup by locating another bank to take over any remaining deposits and loans.
Most customers are unaffected by bank failures, thanks in large part to the FDIC. Customers are unlikely to notice any major disruptions while acquisitions and transfers are taking place behind the scenes. If the bank goes out of business, you may have to open a new account with a different bank, but that would be the only inconvenience.
Additionally, the FDIC is in charge of overseeing consumer protection, educating consumers, handling complaints, and inspecting banks to make sure they abide by federal laws. These efforts are intended to boost trust in the banking system.
Significant Events
The Glass-Steagall Act of 1933 established the FDIC. Its goal during the Great Depression was to prevent bank failures. Customers rushed to their banks to withdraw their deposits after the stock market crashed in 1929. The sudden influx of withdrawals further destabilized the already fragile financial industry, and banks that had invested the majority of their funds in the stock market began to fail. They were unable to refund customers' deposits, and Americans quickly lost faith in banks.
By 1933, so many banks had closed that President Franklin D. Roosevelt declared a bank holiday to put an end to the panic. He closed all US banks on March 6, just 36 hours after taking office. During the shutdown, Congress passed the Emergency Banking Act, which established the FDIC, authorized the Federal Reserve to issue currency to support bank withdrawals, and instituted other financial reforms.
The FDIC claims that since its inception in 1933, "no depositor has ever lost a penny of insured deposits."
Important Takeaways
- The Federal Deposit Insurance Corporation (FDIC) is a non-profit organization that protects bank deposits and advocates for consumers.
- The FDIC was established during the Great Depression to boost confidence in the financial system.
- The FDIC generally insures up to $250,000 per account.
