Federal Deposit Insurance Corporation (FDIC)

What Is The Federal Deposit Insurance Corporation (FDIC)?

In 1933, the Federal Deposit Insurance Corp. (FDIC) was established following the Great Depression. It was designed to create a net of safety and breed confidence in the public towards the U.S. financial system.

One of the main mechanisms in establishing confidence in the public was to insure up to $250,000 per individual when storing cash in U.S. banks. Before the FDIC was created during the Great Depression, the mass public sought to withdraw money. 

Before the Federal Deposit Insurance Corp, the only assurance for the security of deposits was faith in the bank's stability.

Since almost all banks and thrifts now provide FDIC coverage, many customers have less need to worry about their accounts. As a result, banks have a better chance to handle issues in a controlled environment without causing a bank run.

Most average depositors will not surpass this amount, but those with more should distribute their assets over several institutions. Checking, savings, certificates of deposit, and money market accounts are typically completely insured by the Federal Deposit Insurance Corp.

Employee benefit programs, joint accounts, revocable and irrevocable trusts, and corporate, partnership, and unincorporated organization accounts are all covered. Federal Deposit Insurance Corp insurance does not cover mutual funds, life insurance policies, stocks, and bonds. 

The Federal Deposit Insurance Corp does not also provide coverage for the contents of safe deposit boxes. The FDIC continues to provide complete coverage for cashier's checks and money orders issued by the defunct bank. 

A bank's FDIC coverage extends to eligible business accounts held by corporations, partnerships, LLCs, and unincorporated organizations.

Understanding the Federal Deposit Insurance Corporation (FDIC)

If you want to learn more about the FDIC, keep reading for four salient details about this significant institution.

Protecting Deposits Since 1933

To promote greater trust between consumers and financial organizations, the FDIC was established in 1933. Following the 1929 stock market crash, thousands of banks went under. 

Due to the bank run, in March of 1933, President Franklin D. Roosevelt proclaimed a four-day bank holiday. The Banking Act of 1933 was then signed to establish the FDIC.

Protects You Against Bank Failure

When an insured financial institution collapses, the FDIC steps in. The FDIC takes a few actions when a bank goes bankrupt and is unable to reimburse the deposits made by its clients. Notifying clients and the general public of the bank's closure is its first move. 

Once that is done, it ensures that depositors are safeguarded up to the insurance limitations. One of two approaches is used to do this. 

The Federal Deposit Insurance Corp typically collaborates with a strong bank to take on the insured deposits of the defunct financial institution. In the absence of this choice, the FDIC will compensate depositors directly.

The $250,000 Coverage Maximum Can Apply More Than Once

The FDIC insures up to $250,000 per depositor per insured bank, not just per individual. This means that if you have multiple accounts in the same bank, they are combined and insured up to $250,000.

The terms "per Depositor" and "per Insured Bank" have clear definitions. Once more, the categories of deposit account ownership include:

• Accounts that only belong to one individual
• Accounts held jointly by two or more people
• A few retirement accounts
• Trusts, both revocable and irrevocable

Plans for employee benefits maintained by an institution that is insured

Having deposit accounts with several FDIC-insured institutions is another approach to acquiring more than $250,000 in coverage. The insurance limit per depositor for each ownership group at each bank would be applied to each of your accounts.

Provides Educational Resources

In addition to safeguarding your accounts and enhancing the overall security of the American banking system, the Federal Deposit Insurance Corp provides customers with a variety of instructional materials. 

The Federal Deposit Insurance Corp can assist you whether you've experienced a bank failure or you simply want to know more about how your money functions.

• You can also visit BankFind to verify if your bank is one of the more than 4,700 U.S. financial institutions that are FDIC-insured.
• You can determine the amount of insurance that applies to your deposits using the Electronic Deposit Insurance Estimator, or EDIE. To ensure you're maximizing the protection the FDIC provides, you can simulate various scenarios.
• The FDIC's consumer help and information area links to government and nonprofit resources on various subjects, from fundamental personal finance to cybersecurity to credit reports, with a focus on protecting consumers.

For those who enjoy American history, the Federal Deposit Insurance Corp even maintains a chronology of significant financial events from the 1700s to the present. Alternatively, you can quench your curiosity by looking through our list of failed banks.

What does the FDIC do?

A bank regulator closes the institution if it fails, for example, by being unable to repay debts or restore customer deposits.

In general, the FDIC intervenes to protect bank customers' funds in two ways: by paying (or granting access to) monies to impacted consumers up to the insurance limit and by taking over the bank's assets and liabilities. 

When a bank fails, the FDIC acts as the receiver, but its primary role is to manage the resolution process, protect depositors, and maximize the recovery of assets for creditors. 

While the FDIC may sell or collect assets of the failed bank, it does not directly manage insured deposits; rather, it ensures that depositors are reimbursed up to the insurance limits.

Usually, the Federal Deposit Insurance Corp makes arrangements for a strong bank to buy out a failing one.

The Federal Reserve decided to release a program that provides loans of up to one year to banks and credit unions as an additional precaution against future crises. 

The Bank Term Funding Program aims to offer a second source of funding so that banks won't have to swiftly sell up investments, as Silicon Valley Bank did to satisfy depositors.

Despite occasional rises during and after a recession, very few banks fail. There have only been 564 bank bankruptcies since 2001; many occurred during the Great Financial Crisis.

Real World Examples Of The FDIC

Below are a few examples of real-world bank failures; the ones listed occurred during 2023.

First Republic Bank 

San Francisco-based First Republic Bank declared bankruptcy on May 1, 2023. 

JPMorgan Chase Bank will take over all deposits and the majority of the assets of the California bank because the Federal Deposit Insurance Corp was able to arrange a sale of the large commercial bank before its liquidation. 

First Republic's 84 locations will all reopen as Chase locations, and all of the bank's customers will transfer to Chase and have access to all of their deposits. Their cash will continue to be federally insured.

SVB and Signature Bank

The failure of First Republic Bank in 2023 will be the third prominent bank failure. 

Silicon Valley Bank, a lender to the tech sector, fell on March 10 in Santa Clara, California, and Signature Bank in New York failed two days later.

The Treasury, Federal Reserve, and Federal Deposit Insurance Corp announced in a joint statement on March 12 that all Silicon Valley Bank and Signature Bank clients would have access to all of their savings, insured and uninsured.

That didn't include some unsecured loan holders and shareholders. Flagstar Bank purchased Signature Bank on March 20, while First Citizens Bank bought Silicon Valley Bank on March 26.

Reviewed and Edited by Shahrukh Azim Butt | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• 7 Ways to Expand Your Strategic Thinking

• Blockchain

• Chapter 11 Bankruptcy

• Cryptocurrency

• Ponzi Scheme