What Is the FDIC and What Does it Do?
Overview and History of the Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) is a government agency designed to protect consumers and the U.S. financial system. The FDIC is best known for deposit insurance, which helps customers avoid losses when a bank fails, but the agency has other duties as well.
When you deposit funds with a bank, you probably assume the money is safe. It’s hard for somebody to steal it, it won’t be destroyed if your house burns down, and banks have security systems and backup plans that are virtually impossible for any individual to arrange.
However, banks invest deposits to earn revenue, which explains how your bank pays interest on savings accounts, certificates of deposit (CDs), and other products. Those investments include loans to other customers and other, more complex, investments.
Banks typically invest conservatively, but any investment can lose money. If a bank’s investments lose too much, the institution may be unable satisfy the demands of customers who want to use their money deposited at the bank. When that happens, the bank fails.
How the FDIC helps: FDIC insurance allows you to get your money after a bank failure. If an insured bank fails or runs out of money, the FDIC will step in and pay any funds that you are due. However, it’s essential to verify that your funds are in an insured bank and that your deposits are below FDIC limits. The FDIC generally covers up to $250,000 per account holder per institution. However, depending on how your accounts are titled, it may be possible to have more than $250,000 in one institution.
For some joint accounts and retirement accounts can potentially result in more coverage.
The goal of FDIC insurance is to promote trust in the banking system. When your deposits are FDIC insured, the U.S. government stands behind the promise to make you whole.
For more details, see How FDIC Insurance Works. It is essential that you understand what is (and is not) covered by FDIC insurance. Note that FDIC insurance only applies to bank accounts, but credit unions have a similar government-guaranteed form of protection: NCUSIF insurance.
FDIC insurance protects “deposit products” only, including:
- Checking and savings accounts
- Time deposits, like CDs
- Official payments issued by covered banks (cashier’s checks, money orders, for example)
- Money market accounts
FDIC insurance does not cover:
- Securities such as stocks and bonds
- Mutual funds, including money market mutual funds
- Life insurance products, including annuities
- The contents of safe deposit boxes
The list above is not exhaustive— to understand what is (and is not) covered.
How the FDIC Funds Deposit Insurance
When a bank fails and the FDIC pays account holders at that bank, where does the money come from?
The FDIC runs an insurance fund, which is a giant pool of money that can be used to cover bank losses. All of that money comes from insured banks and earnings that the fund generates. Taxpayer dollars do not go into the fund, although the FDIC could potentially fall back on taxpayer support in a worst-case-scenario.
To provide funding, FDIC-insured banks pay “premiums” into the fund. With numerous banks paying premiums, the cost of bank failures is shared and spread out over time. That situation can create a moral hazard (tempting banks to take risks, knowing that other banks will clean up the mess), so regulated banks have to meet certain criteria to be FDIC-insured.
Although the insurance fund is self-funded, FDIC insurance is usually considered “government guaranteed.” The assumption is that the U.S. Treasury would step in if the FDIC insurance fund were to run out of money.
In addition to insuring bank deposits, the FDIC oversees activities at many (but not all) banks and thrift institutions. That oversight is intended to promote a safe banking environment where bank failures are less likely to occur.
Bank failures: When banks do fail, the FDIC gets involved. The agency coordinates the cleanup by finding another bank to take over the failed institution’s deposits and loans. For most customers, bank failures are relatively uneventful—largely due to the FDIC. Customers can typically count on their money being there, and they often continue using the same checks and payment cards.
Consumer protection: The FDIC is also concerned with consumer protection, so the agency monitors banks to make sure they follow consumer-friendly laws. In general terms, the FDIC wants consumers to feel confident about the banking system. To accomplish this, the FDIC provides consumer education, responds to complaints, and examines banks to ensure that they’re following federal laws.
Brief History of the FDIC
The FDIC was created as a result of thousands of bank failures in the 1920s and 1930s. In those events, bank customers lost staggering sums of money. If you didn’t get your cash out before the bank went under, you were out of luck. From time to time, individual states attempted to insure deposits, but none of those programs survived.
Amid chaos and fear about continuing bank failures, the Banking Act of 1933 created the FDIC as a temporary measure to restore order. The Act was signed into law by President Franklin D. Roosevelt. Bank failures and bank runs quickly declined, suggesting that FDIC insurance helped to bolster confidence in the banking system. The FDIC was initially funded by the U.S. Treasury with $289 million, and that funding was repaid to the Treasury in 1948.
The Banking Act of 1935 made the FDIC a permanent agency and refined how the organization works. For example, the insurance funds came from banks instead of the U.S. Treasury. Since that time, the FDIC notes that “no depositor has lost a single cent of insured funds as a result of a failure.”