The FDIC has been in the news a lot in recent years, but during quieter times the agency and what it does are invisible to most Americans.
The closest we get to it is the sign in the bank window that says, “Member FDIC”.
The FDIC is sort of like a giant insurance company for the entire US banking industry (in fact it stands for the Federal Deposit Insurance Corporation). The fact that we usually don’t know what it does is an indication that it’s doing the job it was meant to do.
The History of the FDIC
The FDIC was created under the Glass-Steagall Act in 1933 in the depths of the Great Depression. Large numbers of banks were failing in the 1930’s and confidence in the entire banking system was going down as they did. The FDIC was created in an effort to restore that confidence.
For most of its existence the FDIC has served its purpose well; the confidence it has created in the banking system has limited the number of banking crises to just two in the past 80 years: the savings and loan crisis of the late 1980’s, and the recent financial crisis. And due largely to FDIC intervention, neither of those crises led to anything like the economic disaster that occurred during the Great Depression.
What the FDIC does
Like most government agencies, the FDIC has multiple functions, but the two that are most relevant to most people are deposit insurance and bank regulation.
This is what most of us know the FDIC for—the insurance they provide on our bank deposits.
The ceiling on that coverage, which started out as just $2,500 when the agency began, is now set at $250,000. That limit covers checking accounts of all types, savings accounts, bank money market accounts, certificates of deposits and certain outstanding negotiable instruments.
What FDIC insurance does not cover: any of the above in excess of $250,000 in a single bank, non-bank money market accounts, investment securities (stocks, bonds, mutual funds, ETF’s, etc) or the contents of safe deposit boxes.
The $250,000 limit is per bank, which is to say that you’d get full coverage on $500,000 in deposits if you split them evenly between two unrelated banks.
How effective is FDIC deposit insurance?
Since the FDIC started, no depositor in the US has lost any money on insured bank deposits due to the failure of a bank.
Prevention is the first line of defense against bank default (and the need to pay deposit insurance claims), and that’s why the FDIC has a powerful regulatory presence in the banking industry.
The FDIC monitors the health of banks based on largely on compliance with specified capital ratio requirements. If a bank falls below the required capital ratio requirement, the FDIC has a set of remedies ranging from issuing a warning to the bank, all the way up to declaring the bank to be insolvent which enables the agency to take it over.
Because the FDIC continuously monitors the health of the banks we deal with, we don’t need to do it ourselves. We can bank with confidence and know that our money and our transactions will be protected even if the bank is facing financial troubles.
The make up of the FDIC
The FDIC is set up as a government corporation. That means that while it’s owned by the US government, it operates as an independent agency and maintains its own revenue sources. The independent agency status is set up to minimize political interference.
The agency is governed by five board members, three of which are appointed by the president of the United States.
The FDIC provides deposit insurance out of reserves funded by premiums it collects from member banks. Should that reserve prove insufficient, there is at least an implied guarantee by the US government to cover the shortfall.
Why we need the FDIC
Banking is part of the nation’s financial infrastructure, which is to say that it’s part of the overall national infrastructure in much the same way the interstate highway system and the electric power grid are. The national economy—and our own individual personal economies—can’t exist without a sound banking system.
Something so important as the banking system has to be regulated and insured against failure, and that’s why we have (and need) the FDIC. It has undergone an enormous test since large scale bank failures began in 2007 and it has passed. The FDIC deposit insurance system worked so well that most people’s deposits were completely unaffected by the collapse of the banks that held them.
The FDIC works to keep bank failures from turning into bank runs and wholesale economic collapse. That’s worth the premiums we’re paying to the agency through the banks.
It guarantees us that though we may lose money elsewhere, it won’t be at the banks.