The Federal Deposit Insurance Corporation (FDIC)
The Banking Act of 1933 established The Federal Deposit Insurance Corporation (FDIC), in the aftermath of the Great Depression, in order to inspire confidence within the U.S. banking system. The FDIC is a U.S. Government Corporation structured to operate as an independent agency to insure deposits. In addition to this primary role of insurer, the FDIC also serves in conjunction with the Federal Reserve Board and Office of the Comptroller of the Currency to regulate banks. Be advised that banks, not Congress, fund the FDIC.
Confidence is everything, within the realm of banking and high finance. U.S. Dollars and other fiat currencies are backed by faith in the national government, not by gold or any tangible asset. Meanwhile, banks and financial intermediaries operate by taking deposits and loaning money to finance real estate, capital projects and securities investments. Wall Street traders may refer to leveraging debt to buy assets as the carry trade.
Consumers must remain confident in their abilities to access cash deposits at all times, in order to preserve the sanctity of financial markets. Meanwhile, bank managers must trust that they can make loans against a steady deposit base. If not, banks would reject most loan applications, and Americans would refuse to do business with banks.
Further, customers would line up to withdraw large amounts of money at any sign of economic trouble. The disastrous “bank run” was one of the hallmarks of the Great Depression. Deposits are now insured to lessen these risks.
The FDIC insures the deposits of its member banks, up to a set limit. Deposits may be defined as conventional banking products, such as certificates of deposit, checking, savings and money market deposit accounts. The FDIC insures the principal and interest earnings related to these funds.
Non-deposit investment products including stocks, bonds and mutual funds carry language that reads, “This product is not insured by the Federal Deposit Insurance Corporation,” when they are sold through a financial intermediary. The majority of investment securities expose traders to potential losses.
FDIC Insurance Coverage
FDIC insurance amounts were raised from $100,000 to $250,000 per account type, person and institution in response to the 2008 credit and housing busts. Wealthy individuals can expand their own FDIC insurance coverage by opening separate deposit accounts at different banks. The FDIC categorizes account types into single, joint, corporate, government, employee benefit and trust. FDIC coverage does extend over particular Individual Retirement Accounts (IRAs).
The FDIC regulates banks for financial soundness and consumer protection. Specifically, the FDIC carries direct jurisdiction to enforce law pertaining to insured branches of foreign banks and state-chartered banks that are not members of the Federal Reserve System. The FDIC specifies guidelines for mergers, credit card issuing, payday loans and community reinvestment. The FDIC maintains the authority to seize failed and noncompliant banks to settle the claims of depositors and creditors.
Funding The FDIC
The FDIC collects deposit insurance assessments, or premiums, from its member banks to fund itself. Reserves are also built from investment interest that is earned from U.S. treasury securities. The insurance fund itself is relatively small in proportion to the deposits that are protected. The reserve ratio, or percentage of insurance funds compared to insured deposits, is typically only one percent.
FDIC language says, “FDIC deposit insurance is backed by the full faith and credit of the United States government.” Any shortfalls in FDIC funding may be met with taxpayer money. Take solace in the fact that no depositor has ever lost money related to any FDIC insured product.