Federal Deposit Insurance Corporation (FDIC)

What it is:

The Federal Deposit Insurance Corporation (FDIC) is an agency of the U.S. government that insures deposits in banks and thrift institutions, supervises the risks associated with these insured funds, and limits the repercussions on the economy when a bank or thrift institution fails.

The FDIC was created in 1933 as a result of the bank failures that occurred during the Great Depression.

How it works/Example:

The FDIC insures up to $100,000 of the following kinds of deposits at FDIC-insured banks and thrifts.

  • Checking accounts (including money market deposit accounts)

  • Savings accounts

  • Certificates of deposit (CDs)

  • Certain retirement accounts on deposit at a bank

Coverage
The type of account a depositor holds affects the amount of FDIC coverage he or she may have. For example, let's assume you have three separate accounts at Bank XYZ: a checking account holding $10,000, a second checking account holding $50,000, and a $60,000 CD, for a total of $120,000 on deposit.

If the accounts are all single accounts (single accounts are deposit accounts owned by only one person), then the FDIC adds the account balances together and insures the total up to $100,000. In our example, that means $20,000 of your deposits are uninsured.

The situation changes if you hold the accounts jointly with another person. Because the other person has a right to withdraw money from the account, his or her share is separately insured by the FDIC. This means that in our example, your half of the accounts ($120,000/2 = $60,000) would be insured up to $100,000 and the co-owner's half (the other $60,000) would also be insured up to $100,000. No portion of the accounts would go uninsured.

Alternatively, the FDIC insures certain trust accounts up to $100,000 for each qualifying beneficiary (spouses, children, parents, siblings, grandchildren). The coverage applies to beneficiaries who get the account's assets only when the owner dies. Thus, if you held the $120,000 in a trust for your three grandchildren, the full $120,000 would have FDIC insurance because each beneficiary would be insured up to $100,000.

It is important to note that FDIC coverage is $250,000 per depositor in the case of certain retirement accounts. Thus, if your $120,000 were in one or more self-directed retirement accounts, then those account balances would be added together and insured up to $250,000 (leaving no uninsured balance).

Administration
The FDIC insures the deposits of a bank chartered by a state or federal government. A state-chartered bank has a choice of whether to join the Federal Reserve system; if the bank chooses not to join, the FDIC becomes the bank's primary regulator rather than the Federal Reserve. The FDIC examines and supervises roughly half of the banking institutions in the United States to make sure they are solvent and are complying with banking regulations.

When a bank or thrift institution fails, the bank's chartering authority shuts it down. Then, the FDIC usually sells the deposits and loans of the failed bank to another bank, and the failed bank's customers become customers of the purchasing bank. Usually, customers notice no difference in their accounts, but when a buyer can't be found, the FDIC reimburses depositors for their principal and accrued interest up to the insurance limit. This usually occurs within a few days of the bank's failure.

The FDIC is headquartered in Washington, D.C. and has six regional offices. All five of the FDIC's directors are appointed by the President and confirmed by the Senate. No more than three directors can be from the same political party (this is to provide balance regarding the varying economic views held by the political parties). The FDIC is not funded by taxpayer money; rather, the insurance premiums that banks and thrifts pay for deposit insurance fund the FDIC's operations.

Why it Matters:

The FDIC's job is to maintain public confidence in the U.S. banking system by giving depositors a way out when a bank fails. During the Great Depression, when banks were failing frequently, and there was no deposit insurance, depositors were left with nothing when theIRS banks went belly-up. The mere rumor of a bank having trouble created long lines of panicked depositors eager to withdraw their money just in case. This of course created a self-fulfilling prophecy, because banks make loans with their deposits and hence usually didn't have 100% of those deposits on hand to satisfy nervous customers. According to the FDIC, "No depositor has lost a single cent of insured funds as a result of failure" since FDIC insurance took effect on January 1, 1934.

This is not to say that the FDIC is a catch-all for investors. It is important to understand that the FDIC does not insure stocks, bonds, mutual funds, life insurance policies, annuities, or any other types of investments that bank or thrift institutions may offer. The contents of safe-deposit boxes are also not insured by the FDIC.

For more information about the FDIC, or to use the FDIC's Electronic Deposit Insurance Estimator (to determine whether you have adequate FDIC insurance) visit www.fdic.gov.

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