Sections within this essay:Background
How the FDIC Works
Board of Governors of the Federal Reserve System Division of Consumer and Community Affairs
Federal Deposit Insurance Corporation (FDIC)
Office of the Comptroller of the Currency
Office of Thrift Supervision Consumer Program Division
Congress created the Federal Deposit Insurance Corporation (FDIC) in 1933 to protect consumers who hold their money in banks from bank failures. Depositors—persons who hold money in savings accounts, checking accounts, certificates of deposit, money market accounts, Individual Retirement Accounts (IRAs), or Keogh accounts—have FDIC protection of up to $100,000 in the event of a bank failure. The FDIC regulates all banks that are members of the Federal Reserve System and certain banks that are not members of the Federal Reserve System. It is the FDIC's mission to monitor and regulate the banking industry, making certain that banks operate safely and legally, and to prevent bank failures while encouraging healthy competition within the industry. When a bank does fail by not having sufficient assets, the FDIC uses its money to reimburse the bank's depositors. It then sells the failed bank's assets and uses the profits to assist when other banks fail.
The FDIC employs approximately 8,000 people throughout the country. The headquarters are in Washington, D.C., but regional offices exist in Atlanta, Boston, Chicago, Dallas, Kansas City, Memphis, New York City, and San Francisco. In addition, field examiners, whose job is to conduct on-site inspections of banks, have field offices in 80 more locations throughout the country.
The FDIC has jurisdiction over banks in the 50 states, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands. It regulates banks, enforcing rules such as the Equal Credit Opportunity Act that prohibits certain forms of discrimination in lending, and inspects banks to be sure they are operating profitably and legally. Banks that are insured by the FDIC pay an assessment four times per year to the FDIC. The amount of assessment paid by the bank depends in part on the amount of funds deposited with the bank.
Banking history in the United States changed forever with the Great Depression. The Great Depression began when the stock market crashed in October 1929, causing numerous banks to fail, which in turn caused bank depositors in many cases to lose most or all of their money. U. S. President Franklin Delano Roosevelt and Congress responded by creating the FDIC to guarantee the safety of bank deposits and regain the public's confidence in the banking industry. The history of the FDIC, however, may be traced back even before the Great Depression.
When the United States was formed in 1776, the thirteen original colonies each had their own banking systems, with no uniform currency and little government involvement in the banking systems. In 1791, Congress created the First Bank of the United States, a bank in Philadelphia that closed in 1811. As the country grew, banking remained largely unregulated and inconsistent. Following the Civil War, the economy in the North prospered while the economy in the South floundered. To encourage economic stability and consistency throughout the country, the National Banking Act of 1864 created national banks as well as the Office of the Comptroller of the Currency (OCC), and the dollar became the national currency. Bank failures in the early twentieth century led the creation of the Federal Reserve System, a central bank that continues to oversee and regulate national banks throughout the country.
The economy grew rapidly in the 1920s until the stock market crash in 1929. Stocks quickly lost their value, and as a result, banks lost money, farm prices fell, unemployment soared, and consumers began taking their money out of banks. Many banks failed and closed, lacking sufficient funds to pay their lenders and depositors. Finally, in 1933, President Roosevelt closed all banks temporarily and enacted the Banking Act. The Banking Act of 1933 established the FDIC, giving it authority to regulate and oversee banks and to provide insurance to bank depositors.
In early 1934, the maximum amount of insurance offered by the FDIC was $2,500, but by the end of the year the maximum amount increased to $5,000. Also in 1934, Congress created an entity similar to the FDIC to protect depositors from failures of federal savings and loan institutions. This entity was known as the Federal Savings and Loan Insurance Corporation (FSLIC).
The Banking Act of 1935 made the FDIC a permanent and independent corporation. Banks continued to fail throughout the 1930s, and the FDIC honored its promise to depositors by reimbursing them up to $5,000 for money lost in bank failures. Gradually, the number of bank failures declined, and by the late 1930s banks were becoming more profitable. In 1950, the FDIC maximum amount of insurance rose from $5,000 to $10,000.
In 1960, only four banks insured by the FDIC failed. The FDIC at that time employed approximately 2,500 bank examiners, and by 1962, no banks insured by the FDIC failed. In 1966, the FDIC maximum amount of insurance rose to $15,000, and in 1969, it rose again to $20,000. In 1980, the maximum amount of insurance was $100,000. It remained at that amount as of 2002.
Inflation skyrocketed to 14 percent by 1981, and the interest rates for home mortgages were extremely high at 21 percent. In 1983, the FDIC continued to collect more in premiums from member banks than it paid out for bank failures, but that same year, 48 banks insured by the FDIC failed. By 1984, the FDIC was paying more on bank failures than it collected in bank assessments, with 79 banks failing. In 1985, 125 banks failed, and in 1986, 138 banks, with assets totaling $7 billion, failed. What was worse, savings and loans were failing at an unprecedented rate, prompting Congress to act in 1989 with the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). This act created the Resolution Trust Corporation (RTC) as a temporary agency charged with administering and cleaning up the savings and loan failures. The act also established the Savings Association Insurance Fund (SAIF), which insures deposits in savings and loan associations and charged the FDIC with administering the SAIF. The SAIF replaced the FSLIC.
In 1990, the FDIC began to increase its premium rate for the first time in its history, charging banks more to remain FDIC insured. The Federal Deposit Insurance Corporation Improvement Act of 1991 allowed the FDIC to borrow additional funds from the U. S. Treasury to rebuild its coffers. It also instructed the FDIC to set premiums for banks based upon each bank's level of risk and to close failing banks in more cost-effective ways. No longer was the FDIC permitted to repay all deposits to encourage consumer confidence; rather, Congress strictly limited the FDIC to reimburse only insured depositors and only to the maximum amount allowed by law. Congress also mandated that the Federal Reserve System not lend money to banks in financial trouble. By 1993, bank failure rates were down to their lowest number in twelve years. Congress dissolved the RTC and transferred its duties back to the FDIC that same year.
Provided a financial institution is insured by the FDIC, the FDIC protects any depositor—individual or entity—regardless of whether the depositor is a U. S. citizen or resident. Federally chartered banks, as well as some state chartered banks, are protected by the FDIC. If a banking institution is FDIC-insured, it must display an official FDIC sign at each teller station. The FDIC insures deposits that are payable in the United States; deposits that are only payable overseas do not receive FDIC protection. Investments such as stocks or mutual funds are not FDIC protected. Deposits into accounts such as savings, checking, Christmas Club, certificates of deposit (CDs) are FDIC insured, as are cashiers' checks, expense checks, loan disbursement checks, interest checks, money orders, and other negotiable instruments.
A depositor who has more than $100,000 in deposits is protected only to the extent of $100,000 per FDIC insured institution. This means that consumers who have assets exceeding $100,000 are best served by keeping no more than $100,000 in any one FDIC insured bank. A bank with more than one branch is considered to be one institution, so merely keeping funds in different branch locations may not be safe. For purposes of determining deposit insurance coverage, the FDIC will add all deposits from all branch offices of the same bank for each depositor. Deposits of more than $100,000 maintained in a single banking institution are protected so long as they are maintained in different categories of legal ownership. Examples of different categories of legal ownership include single ownership versus joint accounts, or individual retirement accounts (IRAs), Keogh accounts, or pension or profit-sharing accounts. Different types of accounts, however—checking, savings, certificates of deposit—are not categories of legal ownership. Money contained in separate types of accounts is added together for purposes of determining FDIC insurance coverage.
The FDIC determines legal ownership of bank deposits by examining the bank deposit account records. Assuming those records are unambiguous, the FDIC insurance goes to the individual or entity named. FDIC protection continues for up to six months following the death of a depositor as though the depositor were alive. This protection is important in cases in which the funds of the deceased are left to a survivor whose own bank deposits, combined with those of the deceased, exceed $100,000. Without this protection, the survivor would only receive $100,000 in FDIC insurance; with this protection, the survivor may receive the insurance afforded the deceased depositor as well.
Some states have community property laws, meaning that the property of one spouse may legally be considered as the property of the other spouse as well. Community property laws, however, do not affect the coverage afforded by the FDIC. Even in states that have community property laws, an account held solely in the name of one spouse will not be considered by the FDIC as also belonging to the other spouse. Accounts held in the name of both spouses will be insured by the FDIC as joint accounts. With joint accounts, the interests of each individual are added together and insured by the FDIC to the extent of $100,000. This means that if Mary and Bill have a joint savings account totaling $200,000, the FDIC would completely insure Mary's portion of $100,000 and would also completely insure Bill's portion of $100,000.
In the case of retirement funds, such as IRAs and Keogh accounts, the FDIC considers the accounts to be insured separately from other non-retirement funds held by the depositor at the same financial institution. If a depositor has both IRA and Keogh accounts at the same institution, however, those funds will be added together and insured only to the extend of $100,000. Roth IRAs are treated in the same manner as traditional IRAs.
In the case of business accounts, funds deposited in the name of a corporation or other business entity receive the same FDIC protection—up to $100,000—as do individual accounts. A business entity must not exist merely to increase the FDIC protection afforded an individual depositor; the business entity must exist to perform an "independent activity" to receive FDIC protection. When a business entity owns more than one account, even when each account is designated for different purposes, the FDIC will add the total amounts of all accounts and insure the business entity to a maximum of $100,000. This rule also applies if a corporation has separate units or divisions that are not separately incorporated. If a business entity is a sole proprietorship, the FDIC treats deposits of the sole proprietorship as the funds of the individual who is the sole proprietor. Those funds will be added to any other insured accounts held by the individual, and the FDIC will insure no more than $100,000.
In addition to its powers of insuring bank and savings and loan deposits, the FDIC regulates the banking industry and may, after proper notice and a hearing, discontinue its insurance coverage if a bank engages in overly risky banking practices. When this happens, the FDIC requires the bank to provide timely notice to its depositors of the termination of FDIC coverage.
Bank: a financial institution, chartered by the state or federal government, that exists to keep and protect the money of depositors, disburse funds for payment on checks, issue loans to businesses and consumers, and perform other money-related functions.
Savings and loan: a financial institution, similar to a bank, whose primary purpose it to make loans to customers, most often for the purchase of homes or other real estate.
FDIC: Your Insured Depositwww.fdic.gov, 2002.
West's Encyclopedia of American Law. West Group, 1998.
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Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
What It Means
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the U.S. government whose mission is to maintain and strengthen public confidence in the American financial system. The agency does this by insuring (guaranteeing) deposits in banks and thrift institutions (which include savings banks, savings and loan associations, and credit unions) for up to $100,000 per depositor in case of the institution’s failure. A bank or thrift institution is said to fail when it becomes insolvent, meaning that the value of its liabilities (the money it owes) is greater than the value of its assets (the money and other items of value it has). For instance, if all the depositors at a bank tried to withdraw their money on the same day, the bank would not be able to cover those withdrawals, and a failure would occur. If the bank is a member of the FDIC, however, then every depositor is guaranteed to receive his or her money back (up to $100,000).
The FDIC is not funded by Congress. It raises the funds to insure deposits by charging premiums (insurance fees) to each of its membership institutions. The premiums are calculated according to the amount of deposit insurance each institution requires. The FDIC also derives funds from its investments in U.S. Treasury securities (loans to the government that pay interest). In 2007 the FDIC insurance fund totaled more than $49 billion, and the agency insured more than $3 trillion worth of deposits in U.S. financial institutions.
In addition to its function as an insurer, the FDIC also conducts research and analysis to identify and monitor banking activities and economic conditions that may pose risks to deposit insurance funds. The FDIC also takes various measures to help banks avoid failure and to limit the impact of bank failures on the economy as a whole. In each of these ways the FDIC plays a critical role in stabilizing the U.S. economy.
When Did It Begin
The FDIC was created under the Glass-Steagall Deposit Insurance Act of 1933 in response to the most severe banking crisis in U.S. history. Between the time of the stock market crash of 1929 (at the onset of the Great Depression, which lasted until about 1939) and the inauguration of President Franklin Delano Roosevelt on March 4, 1933, 9,000 banks failed in the United States, resulting in the loss of $1.3 billion in deposits. The establishment of the FDIC was part of a broader effort to prevent such a financial collapse from happening again and to restore public confidence in the banking system. The initial capital (funds) required to start the corporation was supplied by the U.S. Treasury and the 12 Federal Reserve banks (the Federal Reserve is the central banking system in the United States, and independent agency of the U.S. government established in 1913).
Under the leadership of Walter Cummings (1879–1967), who served as chairman during the FDIC’s initial organization, the agency conducted a massive effort to evaluate the solvency of individual U.S. banks. By the time FDIC insurance went into effect on January 1, 1934, 13,201 banks were insured or approved for insurance, representing 90 percent of all commercial banks (banks that have traditionally focused on short-term accounts and issuing business loans) and 36 percent of all mutual savings banks (a type of thrift; thrifts began by specializing in handling long-term savings deposits and issuing home loans). Under the Temporary Federal Deposit Insurance Fund (which remained in effect for the first year and a half), individual depositors were insured for a maximum of $2,500. When the permanent fund was inaugurated under the Banking Act of 1935 (effective July 1 of that year), the maximum deposit insurance was raised to $5,000.
From the outset of the FDIC’s operation, public confidence in the banking system was dramatically improved. During 1934 total deposits in commercial banks increased by about $7.2 billion dollars, or 22 percent, which represented about a 50 percent recuperation of the deposits that had been lost during the preceding three years.
More Detailed Information
The FDIC is headquartered in Washington, D.C., with 12 regional offices and numerous field offices around the country. The agency is run by a three-person board of directors consisting of the Comptroller of the Currency (the presidentially appointed head of the Office of the Comptroller of the Currency, a bureau within the U.S. Treasury Department) and two other directors who are appointed by the president and approved by the Senate. Most of the FDIC’s more than 5,000 employees are bank examiners (people who evaluate the solvency of banks).
FDIC insurance covers many kinds of accounts: checking accounts; savings accounts; money market deposit accounts (also known as MMDAs; these are savings accounts that allow the account holder to write a limited number of checks per month); money market accounts (high-interest savings accounts, not to be confused with money market funds); certificates of deposit (also known as CDs; these are deposits that earn high rates of interest but cannot be touched for a preset amount of time); and outstanding cashier’s checks (a customer may purchase a cashier’s check at a bank in a specific amount in order to make a payment to a specific third party; an outstanding cashier’s check is one that has been purchased but not redeemed), interest checks, and any other negotiable instrument (a written order to pay) that is drawn on the accounts of the insured bank.
There are many financial items the FDIC does not cover, even if those items are purchased through or held by an insured institution. Noninsured items include various kinds of investments in corporations or in the federal government (such as stocks, bonds, money market funds, mutual funds, and U.S Treasury securities) and the contents of safe-deposit boxes (boxes kept in a bank vault in which customers can store valuables). Also, the FDIC does not cover insurance policies, financial losses that arise from theft or fraud (banks are insured against these eventualities by private companies), or losses because of bank errors in an individual’s account (there are other procedures for pursuing compensation for this).
In order to have its deposits covered (insured) by the FDIC, every bank or other financial institution must maintain certain standards of financial stability. A bank’s stability is a measurement of its reserves and its liquidity. Reserves are the amount of money the bank sets aside (and does not loan or invest) in order to meet the daily cash withdrawals of its customers. Liquidity is the amount of assets a bank can convert into cash in a relatively short period of time without losing substantial value (to liquidate an asset is to sell it; stocks, or shares of ownership in corporations, are considered more liquid than real estate—property—as assets, because they can be sold more quickly.) An optimally stable institution is described as well capitalized, which means that it has a relatively high ratio of capital (money it has on hand) to risk-based assets (investments that have value, generate money, or both but that are not as secure as, or are riskier than, money in hand). Based on its analysis, the FDIC classifies banks in the following categories:
- Well capitalized: 10 percent or higher ratio of capital to risk-based assets
- Adequately capitalized: 8 percent or higher ratio
- Undercapitalized: less than 8 percent ratio
- Significantly undercapitalized: less than 6 percent ratio
- Critically undercapitalized: less than 2 percent ratio
If a bank becomes undercapitalized, the FDIC takes certain measures to prevent the bank from failing. First, the agency issues a warning advising the bank to take corrective actions to improve its capital ratio. If necessary the FDIC may impose certain corrective actions, such as changing the bank’s management, loaning the bank money, buying off some of its assets, or even facilitating a merger (whereby the unstable bank is unified with or absorbed by a stronger bank). If a bank sinks to the level known as critically undercapitalized, the FDIC declares it insolvent.
Federal deposit insurance faced its first major challenge in the late 1980s, during what became known as the Savings and Loan Crisis. Beginning in 1934 savings and loan associations (also known as S&Ls) were insured and overseen by the Federal Savings and Loan Insurance Corporation (FSLIC), a parallel institution to the FDIC. In the late 1980s various circumstances (including poor management, risky investments, widespread fraud, changing economic conditions, and incompetent government supervision) combined to set off a massive wave of savings and loan institution failures, which led to the insolvency of the FSLIC and ultimately the wholesale collapse of the savings and loan industry.
In response to this disastrous and scandalous episode in U.S. financial history, Congress passed the Financial Institutions Recovery, Reform and Enforcement Act of 1989 (FIRREA), which reorganized the FDIC into two units: the Bank Insurance Fund (BIF) continued to insure banking institutions (as the FDIC had traditionally done); while the Savings Association Insurance Fund (SAIF) was created to insure savings and loan deposits, replacing the FSLIC, which was abolished. With the passage of FIRREA, the financial burden of alleviating the crisis was also shifted to U.S. taxpayers, who ended up paying more than $100 billion to steady the savings and loan industry.
In 2005 Congress passed the FDI Reform Act, which consolidated the BIF and the SAIF into a single insurance fund called the Deposit Insurance Fund (DIF). The FDI Reform Act also increased the maximum amount of federal deposit insurance on retirement accounts from $100,000 to $250,000 and broadened the FDIC’s ability to increase insurance maximums on regular bank accounts in the future.
Federal Deposit Insurance Corporation
FEDERAL DEPOSIT INSURANCE CORPORATION
The Federal Deposit Insurance Corporation (FDIC) was created on June 16, 1933, under the authority of the Federal Reserve Act, section 12B (12 U.S.C.A. § 264(s)). It was signed into law by President franklin d. roosevelt to promote and preserve public confidence in banks at the time of the most severe banking crisis in U.S. history. From the stock market crash of 1929 to the beginning of Roosevelt's tenure as president in 1933, over 9,000 banks closed their doors, resulting in losses to depositors of $1.3 billion. The FDIC was established in order to provide insurance coverage for bank deposits, thereby maintaining financial stability throughout the United States.
The FDIC is an independent agency of the federal government. Its management was established by the Banking Act of 1933. It consists of a board of directors numbering three members, one the comptroller of the currency, and two appointed by the president with approval of the Senate. The two appointed members serve six-year terms, and one is elected by the members to serve as chair of the board. The headquarters of the FDIC is located in Washington, D.C., and the corporation has 13 regional offices. Most of its employees are bank examiners.
The FDIC does not operate on funds from Congress. The capital necessary to start the corporation back in 1933 was provided by the U.S. Treasury and the 12 Federal Reserve banks. Since then, its major sources of income have been assessments on deposits held by insured banks and interest on its portfolio of U.S. Treasury securities.
Besides administering the Bank Insurance Fund, the FDIC is also responsible for the Savings Association Insurance Fund (SAIF), which was established on August 9, 1989, under the authority of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) (12 U.S.C.A. § 1821 (2)). The SAIF insures deposits in savings and loan associations.
The FDIC also insures, up to the statutory limitation, deposits in national banks, state banks that are members of the Federal Reserve System, and state banks that apply for federal deposit insurance and meet certain qualifications. If an insured bank fails, the FDIC pays the claim of each depositor, up to $100,000 per account.
The FDIC may make loans to, or purchase assets from, insured depository institutions in order to facilitate mergers or consolidations, when such action for the protection of depositors will reduce risks or avert threatened loss to the agency. It will prevent the closing of an insured bank when it considers the operation of that institution essential to providing adequate banking.
The FDIC may, after notice and a hearing, terminate the insured status of a bank that continues to engage in unsafe banking practices. The FDIC will regulate the manner in which the depository institution gives the required notice of such a termination to depositors.
From 1980 to 1990, a total of 1,110 banks failed, principally owing to bad loans in a slowly weakening real estate market and risky loans to developing countries. The FDIC found itself in such financial straits that in 1990, Chairman L. William Seidman testified before Congress, "The insurance fund is under considerable stress" and is "at the lowest point at anytime in modern history."
The FIRREA and the FDIC Improvement Act of 1991 (codified in scattered sections of 12U.S.C.A.) came as reactions to the savings and loan crisis and to a banking crisis of the 1980s, which together cost the U.S. taxpayers hundreds of billions of dollars.
FIRREA gave the FDIC the authority to administer the SAIF, replacing the Federal Savings and Loan Insurance Corporation (FSLIC) as the insurer of deposits in savings and loan associations. The FDIC Improvement Act placed new restrictions on the way that the corporation repaid lost deposits. Before the law's enactment, the FDIC deemed it necessary to repay all deposits, whether or not they were at an insured bank or over $100,000, in order to protect public confidence in the nation's financial institutions. Since the law's enactment, it must take a "least-cost" method of case resolution. The act stipulates that the FDIC will not be permitted to cover uninsured depositors unless the president, the secretary of the treasury, and the FDIC jointly determine that not doing so would have serious adverse effects on the economic conditions of the nation or community.
The FDIC has worked with Congress on legislative proposals for deposit insurance reform. Although the FDIC has not proposed immediately raising the amount of insurance from $100,000 per account, it has recommended that the amount should be indexed for inflation using the Consumer Price Index every five years. The FDIC has proposed that such an indexing adjustment be made in 2005. In addition, it has recommended that the limit should not decline if the price level falls.
FDIC 2002 Annual Report. Available online at <www.fdic.gov> (accessed July 9, 2003).
Seidman, William L. 1993. Full Faith and Credit. New York: Random House.
White, Lawrence J. 1991. The S & L Debacle. New York: Oxford Univ. Press.
Federal Deposit Insurance Corporation
FEDERAL DEPOSIT INSURANCE CORPORATION
"Deposits insured by the FDIC." Many banks today promote the insurability of customer deposits with this simple slogan, but this wasn't always the case. Prior to 1933, people depositing their money into a bank had no guarantee that their money was safe. From the stock market crash of 1929 to the first years of President Franklin Roosevelt's (1933–1945) administration, nine thousand banks collapsed, and depositors lost $1.3 billion.
Public confidence in the banking system collapsed along with the banks. In the hard times of the Great Depression, the government needed to bolster public confidence and maintain financial stability in the nation. The Federal Deposit Insurance Corporation (FDIC) was an effort to do just that. When the Glass-Steagall Act became law in 1933, it provided for the creation of the FDIC, which provides insurance coverage for bank deposits.
The FDIC insures deposits in national banks, Federal Reserve member state banks, and state banks that have applied for federal deposit insurance and meet FDIC qualifications. After its inception, the FDIC tried to repay all deposits, regardless of whether they occurred at an insured bank or were over $100,000. This method was felt to be the best way to keep public confidence in the banking system high.
In the 1980s, however, the country experienced a savings and loan crisis. Between 1980 and 1990, 1,110 banks failed. Their failure was caused in part by bad loans in a weak real estate market and also by risky loans to developing countries. Until this time the Federal Savings and Loan Insurance Corporation handled insured deposits at savings and loan associations. With the FDIC Improvement Act of 1991, the FDIC was given authority to insure deposits at savings and loan associations and new restrictions were made on how the organization repaid lost deposits.
The FDIC now operates by a "least-cost" method. If an insured bank collapses, the FDIC pays up to $100,000 of a depositor's claim. It is not allowed to cover uninsured depositors unless the president, the secretary of the treasury, and the FDIC jointly agree that failing to do so would seriously effect the economic conditions of the nation or the community.
See also: Federal Reserve System, Glass-Steagal Banking Act
FDIC • abbr. Federal Deposit Insurance Corporation, a body that underwrites most private bank deposits.