Learn about the rule of thumb that can guide your spending and savings decisions.
What is the Federal Deposit Insurance Corporation (FDIC)?
The Federal Deposit Insurance Corporation, or FDIC, protects the money people deposit into their bank accounts. When a bank fails, or when a financial crisis induces large numbers of people to withdraw their money, account holders may lose the money they deposited. The FDIC was created to not only establish a reserve of cash against deposits but give people confidence in the banking industry.
During the Great Depression, thousands of banks across the country failed, and cash deposited by their customers effectively vanished. In response, President Franklin D. Roosevelt established the FDIC with the purpose of insuring deposits. The amount insured has increased several times since then, and as of 2011 deposits are insured up to $250,000 per person, per bank, per each account ownership category like retirement accounts and trusts. The FDIC is not funded by taxpayers, but by insurance premiums paid by banks and thrift institutions, and coverage is automatic for depositors at FDIC-insured banks.
The FDIC’s scope has expanded over time to insure not only checking accounts but also savings and money market accounts, certificates of deposit (CDs), and certain cash instruments like cashier’s checks. In addition to insuring deposits, the FDIC also helps regulate the financial industry by monitoring about 4,000 banks for stability and certifying banks’ compliance with consumer protection laws like the Fair Credit Reporting Act.
When it detects that a bank has failed, the FDIC’s first course of action is to sell the failing bank’s assets to another bank. In recent years, the FDIC doesn’t so much protect banks from huge groups of customers withdrawing their money as protect customers from banks issuing too many bad loans. That’s because banks rarely fail because customers lose confidence in them, but because poor economic conditions force borrowers to default en masse and deprive banks of funds to continue their operations. When that happens, the FDIC doesn’t work to prop up the bank, but to make sure its customers don’t lose everything.
Virtually any bank you deposit your money is in insured by the FDIC. Find a great checking account with Bankrate’s comparison tool.
Cleo has $4,000 in a savings account at her small, FDIC-insured bank. A few years ago, the bank issued several billion dollars in loans to people in an effort to take advantage of low interest rates. The borrowers started defaulting one by one, and soon the bank was having trouble keeping cash on hand. The FDIC stepped in and sold the bank’s accounts to a larger bank, saving Cleo’s $4,000 by transferring it to a more stable institution.