Bank of Dudley

According to their website, the Federal Depositors Insurance Corporation (FDIC) exists to “…maintain stability and public confidence in the nation’s financial system.” This independent agency accomplishes this goal by:

• Insuring deposits, guaranteeing that customer deposits into a commercial bank account will be available for later withdrawal
• Supervising the operations of financial institutions to ensure that they’re financially sound and in compliance with applicable regulations
• Facilitating the resolution of failing banks to minimize the impact on the bank’s account holders
• Managing receiverships of failed banks to keep them operational until a buyer can be found

You hear it at the end of every bank advertisement: “Member, FDIC.” What does that mean?

Since 1933, the Federal Deposit Insurance Corporation, or FDIC, has insured deposits placed in banks in the United States, guaranteeing that a specified amount of each bank customer’s deposited money will be available to them – even if the bank itself fails.

This month, we’re talking about the FDIC, explaining how it insures bank deposits and answering other frequently asked questions about this Depression-era institution as we ask: What is the FDIC?

What Is the FDIC?

The Federal Deposit Insurance Corporation was established in 1933, during the early years of the Great Depression, to restore consumer confidence in the US banking system.

The FDIC performs several roles to help ensure that people retain a certain level of trust in the banking system. Of these several roles, the one that most directly affects accountholders is deposit insurance. It is extremely rare for an FDIC-insured bank to go bankrupt or otherwise be declared “failed.” But, when that does happen, the FDIC will step in and reimburse the bank’s account holders the total amount of their deposits (up to a specific limit), preventing the bank’s failure from ruining their customers’ financial futures.

According to the FDIC’s website, no depositor has ever lost a penny of FDIC-insured funds in more than 90 years of operation.

The other roles of the FDIC are more concerned with protecting depositors’ money by protecting the banks themselves: overseeing compliance with financial and consumer protection regulations and providing assurance and oversight of the complex chain of events that starts when a bank fails.

Why Was the FDIC Founded?

In the years before the formation of the FDIC, more than a third of all banks in the US failed, many as a result of bank runs.

What’s a bank run? Most banks operate on a “fractional reserve” basis, meaning that they don’t keep cash on hand equal to their total deposits. Typically, this is perfectly fine since only a tiny portion of a bank’s total deposits are ever withdrawn at one time.

At the dawn of the Great Depression, however, banks became heavily leveraged with bad debt, and many started to show signs of insolvency. When that happened, word would get around quickly about the bank’s upcoming failure, and hundreds or thousands of account holders would descend on the bank to withdraw their money before it was lost. As more money was withdrawn, bank reserves became wholly depleted, and failure became inevitable.

Recognizing the role of low consumer confidence in this devastating chain of bank collapses, Congress passed the Banking Act of 1933, creating (among other things) the FDIC. By assuring depositors that their money would be protected by the full faith and credit of the US government, the FDIC virtually eliminated bank runs and their cataclysmic effects on the financial system.

How Does the FDIC Protect My Money?

Unlike most other insurance policies, you don’t have to do anything special to protect your deposits; as soon as you deposit into a qualifying account at an FDIC-member bank, your funds are protected – up to applicable limits.

What Does the FDIC Insure?

FDIC coverage will pay up to $250,000 per account holder, per bank, per “ownership category.” The ownership categories recognized by the FDIC are:

• Single accounts that don’t fall into any other category
• Joint accounts
• Certain retirement accounts like IRAs
• Trust accounts
• Employee benefit accounts
• Certain business accounts
• Government accounts

So, to give an example, our fictional account holder, John, holds five accounts:

• One single checking account at Town Bank, with $185,000 deposited
• One single savings account at Town Bank, with another $275,000 deposited
• A joint account at Town Bank, with $32,000 deposited
• A savings account at Local Bank, with $190,000 deposited
• An IRA at Local Bank, with $257,000 deposited

If both Town Bank and Local Bank were to collapse, the FDIC would pay John at least:

• $250,000 for the single checking and single savings accounts at Town Bank combined since they’re at the same bank and in the same ownership category. Since the combined account balance is higher than $250,000, the FDIC will not guarantee to reimburse John for the total deposited amount.
• $32,000 for the joint account at Town Bank since it falls into a different ownership category than the other two accounts.
• $190,000 for the Local Bank savings account since it’s at a different bank from the other accounts.
• $250,000 for the IRA account. Since the account balance is higher than $250,000, the FDIC will not guarantee to reimburse John for the total deposited amount.

What Does the FDIC Not Insure?

The FDIC covers a large number of financial products, but its protection is not unlimited. These types of investments and products are not covered by the FDIC:

• Deposits in credit unions*
• Stocks, bonds, and mutual funds
• Annuities
• Life insurance policies
• Safe deposit boxes
• US Treasury bills, bonds, or notes
• Municipal securities
• Cryptocurrency assets

*Deposits in credit unions are protected by a different entity, the National Credit Union Share Insurance Fund, part of the National Credit Union Association.

Where Does the FDIC Get Its Money?

As an independent agency, the FDIC is not federally funded. Instead, it maintains a fund known as the Deposit Insurance Fund (DIF), which is funded by the premiums that banks pay to the FDIC for coverage.

In the event of a severe crisis, the FDIC also carries a $100 billion line of credit with the US government that it can draw upon to pay depositor claims. To date, however, no federal funds have been used to pay deposit claims, and the size of the DIF has increased annually since 2009.

FDIC-Insured, Customer Focused, and 100% Local: Bank of Dudley

Since 1905, the team at Bank of Dudley has remained dedicated to helping our neighbors find financial success. Our local bankers are always ready to help you navigate the complex world of personal and business banking, and we’re 100% committed to helping you find the products and services that work for you – and helping you meet your financial goals. Call today and discover true relationship banking: 478-277-1500[Lg1]

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