Federal Deposit Insurance Corp. (FDIC): Definition & Controls
What Is the Federal Deposit Insurance Corp. (FDIC)?
The Federal Deposit Insurance Corp.(FDIC) is an independent agency of the federal
government. FDIC was created under the Banking Act of 1933, supplying deposit insurance
in case of bank failures.
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| Federal Deposit Insurance Corp. (FDIC) |
The purpose of FDIC creation was to supervise financial institutions and maintain financial
stability, and public confidence in the sound banking system of the nation.[1]. As of April
2024, FDIC insures deposits to at least $250,000 per depositor per ownership category at
each bank that remains FDIC-insured. This insurance coverage maintains stability and
consumer confidence in the U.S. financial system.[2].
Without deposit insurance, bank failures could cause panic. Due to a lack of confidence,
urgent money withdrawals from other banks could jeopardize the banking system. Bank
instability was already present before the Great Depression. 5,700 bank failures occurred
from 1921-1929, with nearly 10,000 from 1929-1933. [3].
This panic led to the closure of almost all banks. It destroyed the economic system of the
country. Over it, a man in the street blamed the government. The US government did not
want to be held liable for individual bank mistakes. With public support for FDIC creation,
President Franklin D. Roosevelt signed the 1933 Banking Act and created the FDIC.
Before it, there was no safety on deposits. Since FDIC insurance coverage started, FDIC
claims no single penny of consumers is lost in bank failures.
Understanding the FDIC Meaning
Now customers face less risk over bank deposits as almost every bank offers FDIC
coverage. There is no separate way to apply for or purchase deposit insurance for this
coverage, just placing deposits in a bank that is an active member of the FDIC list, makes it
eligible for insurance coverage, if the bank fails, up to $ 250,000, per account with the
same name deposit, per FDIC-insured institution, and per ownership category.
The ownership category is a way you place your deposit, it includes single accounts, trust
accounts, joint accounts, and business accounts. This category helps the depositors, who
have deposited more than $ 250,000, to divide deposits over multiple ownership categories,
as multiple ownership categories cover a separate FDIC insurance up to $ 250,000, and add
up. Here are two examples for further clarification.
Example 1:
If a customer has $150,000 in a savings account and $150,000 in a certificate of deposit
(CD), he has $50,000 uninsured.
Example 2:
If the bank defaulted, you have a single CD account in his name with a principal balance of
$195,000 and $5,000 in accrued interest, the full $200,000 would be insured by FDIC.
The FDIC provides helpful guides to check whether my deposits are protected or not by the
FDIC.
What does the FDIC Cover?
Understanding what the FDIC covers can help make informed decisions about where to
place your money. The FDIC's primary role is to protect deposit accounts in the event of a
bank failure.
The FDIC insures deposits at member banks and savings institutions up to $250,000 per depositor, per insured bank, for each account ownership category.
The FDIC offers deposit insurance for deposit accounts like checking, savings, money
market deposit accounts (MMDAs), and CDs at FDIC-insured banks. FDIC also protects
the ownership categories extending to joint accounts, Individual Retirement Accounts
(IRAs), deposit accounts of corporations, partnerships, and unincorporated associations.
Each above ownership category protects up to $250,000. This Coverage is automatic.
There is separately no need to apply.
It is important to be clear that all deposits are not covered by FDIC. Certain investment
products like stocks, bonds, mutual funds, life insurance policies, annuities, or securities are
not insured. FDIC will not also cover the deposits of non-FDIC-member banks.
Filing Claims
For filing a case, a customer can visit the official website of the FDIC to lodge complaints
about bank failures, inviting the FDIC to open a deposit insurance case. You can visit the
FDIC's page that covers the frequently asked questions.
You can contact the FDIC Contact Center at 1-877-ASK-FDIC (877-275-3342) from 8:00
am - 6:00 pm ET; Monday-Friday & 8:00 am - 1:00 pm ET; Saturday.
In case of bank failure, the FDIC acts in two ways: the receiver of the failed bank, and
insurer of the bank deposits.
As a receiver of the failed bank, FDIC assumes control of selling the bank's assets and
securities and clearing debts or deposit insurance claims. As an insurer of bank deposits,
FDIC pays insurance claims within a few days of bank failure. FDIC only covers bank
failure and no claim on theft, fraud, and loss occurs due to the bank side.
Special Point for Noting
FDIC protects the deposits at banks and deposits at credit unions are covered by
the National Credit Union Share Insurance Fund (NCUSIF). It provides insurance to the
credit unions insured with NCUIF, each member up to $ 250,000. [4].
FDIC New Deal: New Trust Rule April 2024
The following are the FDIC's April 2024 changes.
Taking effect from 01, April 2024, FDIC approved a new final Rule on the Simplification of
Deposit Insurance Rules for Trust and Mortgage Servicing Accounts.
A) Deposit Insurance Rules for Trust Accounts:
Deposit insurance rules for revocable and irrevocable trusts will be replaced with a simpler
common rule for easier understanding of deposits and bankers.
Deposit owner's trust deposits will be insured up to $250,000 for each trust beneficiary not
exceeding five, regardless of the type of trust (revocable or irrevocable) or contingencies.
For trust deposit accounts, there will be a maximum deposit insurance coverage of
$1,250,000 per owner, per insured institution.
B) Deposit Insurance Rules for Mortage Servicing Accounts
The current mortgage rules provide insurance coverage based on each mortgagor's payments
of principal and interest up to $ 250,000.
The final rule allows for servicers' advances of principal and interest funds to be insured up
to $250,000 per mortgagor under the current rule
In summary, the FDIC insures deposits in US banks and provides support in case of bank
failure. It was created during the Depression to promote financial stability and deposits up
to $250,000 per depositor are insured. So, just make sure to open a deposit account in a
bank that is an active member with FDIC and offers insurance coverage.
FAQS
★ What Does FDIC Stand For?
FDIC stands for Federal Deposit Insurance Corporation, an independent agency that
insurers bank deposits.
★ Why Was the FDIC Created?
FDIC was created to maintain stability and public confidence in the banking
system. Historically, the FDIC's main purpose is to prevent bank-run situations that
wrecked thousands of banks or financial institutions during the Great Depression in the late
1920s.
★ Are My Stock and Mutual Fund Holdings Protected by the FDIC?
No. FDIC does not protect the loss on mutual funds, annuities, life insurance policies, and stocks and bonds. All are investment products, not deposits, that's why FDIC offers no loss protections on it.
★ FDIC New Deal Purpose:
FDIC's new deal purpose is to offer protection and loss reimbursement to the depositors on bank failures, prevent economic disruption, and win public confidence in the country's banking system.
Article Sources:
- Federal Deposit Insurance Corp. "FDIC: History of the FDIC., https://www.fdic.gov/about/history/"
- Federal Deposit Insurance Corp. "Your Insured Deposits, https://www.fdic.gov/resources/deposit-insurance/brochures/documents/your-insured-deposits-english.pdf" Page 3,5.
- FDIC (1998). Managing the Crisis: The FDIC and RTC Experience. ,https://www.fdic.gov/resources/publications/managing-the-crisis/index.html, Vol. 1. Retrieved January 19, 2023,"
- National Credit Union Administration. "Share Insurance Fund Overview. ,https://ncua.gov/support-services/share-insurance-fund"
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