Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation (FDIC) is an independent agency—created by the U.S. government—designed to protect consumers in the U.S. financial system. The FDIC is best known for deposit insurance, which helps protect customer deposits in case a bank fails.

Here’s what you need to know about how the FDIC protects you, how it’s funded, and why it was created.

What Is the FDIC?

The Federal Deposit Insurance Corporation is one of the agencies that help promote a healthy financial system in the U.S. Its duties include insuring deposits and overseeing major financial institutions.

By conducting this oversight and supervision, this independent federal agency hopes to increase trust in the banking system.

When your deposits are FDIC-insured, that essentially means that the U.S. government is guaranteeing that the money you deposited will be there when you need it.

The Beginning of the FDIC

America’s financial markets lay in ruin by the early 1930s. More than 9,000 banks failed by March of 1933 because of the financial chaos triggered by the stock market crash of October 1929, signaling the worst economic depression in modern history.

In March 1933, President Franklin D. Roosevelt addressed Congress, saying:

“On March 3, banking operations in the United States ceased. To review at this time the causes of this failure of our banking system is unnecessary. Suffice it to say that the government has been compelled to step in for the protection of depositors and the business of the nation.”

Congress took action to protect bank depositors by creating the Emergency Banking Act of 1933, which also formed the FDIC. The FDIC’s purpose was to provide economic stability and the failing banking system.

Officially created by the Glass-Steagall Act of 1933 and modeled after the deposit insurance program initially enacted in Massachusetts, the FDIC guaranteed a specific amount of checking and savings deposits for its member banks.

How Does the FDIC Work?

When you deposit funds with a bank, you probably assume the money is safe. It won’t be destroyed if your house burns down. It won’t be stolen by a thief who steals your wallet.

And banks have security systems and backup plans that are virtually impossible for any individual to overcome. The FDIC is responsible for ensuring that your deposits are as safe as you assume.

Protecting Your Investments

However, when you deposit your money into a bank account, the cash doesn’t just sit in a vault somewhere. Banks invest deposits to earn revenue—that’s how they pay interest on savings accounts, certificates of deposit (CDs), and other products. Those investments include loans to other customers, stocks, and many other types of investments.

Banks typically invest conservatively, but any investment can lose money, and some banks are comfortable taking more risks than others.

If a bank’s investments lose too much, the institution may be unable to satisfy the demands of customers who want to use the money they have deposited at the bank. When that happens, the bank has failed, and the FDIC steps in.

Insuring Against Bank Failure

If your bank has failed, and it’s unable to give you back your cash deposits, then the FDIC provides that cash instead. In other words, even if your bank goes completely out of business, you will receive the money you had in your account.

The only catch, from the consumer’s point of view, is that there are limits to FDIC insurance. The FDIC generally covers up to $250,000 per account holder per institution.

However, some joint accounts and retirement accounts could potentially have more than $250,000 insured at a single institution. You can also maintain accounts with different institutions and increase your insured deposits that way.

FDIC insurance limits used to be set at $100,000. Then, during the 2008 financial crisis, the FDIC temporarily raised the limit to $250,000 per account ($500,000 per joint account).1 In 2010, the Dodd-Frank Wall Street Reform Act made the $250,000 limit permanent.

What Is Covered (and What Isn’t)?

While FDIC insurance provides a lot of security for American families, not all funds in the financial system are covered by FDIC insurance. It’s important to understand what’s insured and what isn’t. FDIC insurance applies only to bank accounts held at member financial institutions.

FDIC insurance only protects “deposit products,” including:

  • Checking and savings accounts
  • Time deposits, like CDs
  • Official payments issued by covered banks, including cashier’s checks, and money orders

Credit unions have a nearly identical government-guaranteed form of protection through the National Credit Union Administration (NCUA) under the name of the National Credit Union Share Insurance Fund. This type of insurance covers the same kind of deposit accounts covered by FDIC insurance, but at credit unions instead of banks.

While the items listed above have coverage, many financial and investment products do not receive protection from either the FDIC or the NCUA.

These include securities you may hold in an investment or retirement account such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), life insurance or annuity products, or the contents of a safe deposit box.

What the FDIC does insure

When you have a deposit account at an FDIC-backed bank — such as saving, checking, a money market account, or certificate of deposit (CD) — your deposits are backed up to at least $250,000 per bank, per person, per account type.

You don’t need to sign up for FDIC insurance. If it’s an FDIC-backed bank, you’re automatically covered up to that amount.

The types of accounts the FDIC insures includes:

  • Savings accounts 
  • Checking accounts
  • Money market accounts 
  • Certificates of deposits (CDs) 
  • Cashier’s checks 
  • Money orders

A quick tip: Credit unions are different from traditional banks in that the funds are insured by the National Credit Union Share Insurance Fund (NCUSIF). This is an organization that’s backed by the National Credit Union Administration (NCUA).

What the FDIC doesn’t insure

However, the FDIC doesn’t insure all types of accounts like payment apps, investment accounts, or insurance policies, which includes: 

  • Investments in stocks, bonds, or mutual funds 
  • Life insurance policies
  • Annuities 
  • Safe deposit boxes or their contents 
  • Municipal securities 
  • Money in apps such as PayPal or Venmo

An exception to PayPal is when you add money to your PayPal account using direct deposit. In this case, that money will be eligible for what’s known as FDIC pass-through insurance.

When you buy cryptocurrency or add money to your Venmo account using remote capture or direct deposit, funds from your Venmo balance also can be backed up by FDIC pass-through insurance.

Although funds in a payment platform such as Venmo or PayPal aren’t typically backed by the FDIC, there might be exceptions, so be sure to comb over the fine print.

How to confirm your bank’s FDIC status

To find out if your financial institution is FDIC-insured, you can either ask a bank representative, look for the FDIC sign at your bank, or you can use the FDIC’s BankFind tool, explains Breitbell.

This tool lets you access specific information about FDIC-backed banks, such as the current operating status, its website, branch locations, and the regulator to reach out to for more information or help. 

How to Confirm a Bank’s FDIC Status

If you are shopping around for a new bank and you want to ensure it is FDIC-insured, the quickest and easiest way is to go to the FDIC’s search feature on its website.

Enter information like the name of the bank, its location, and its web address, and it should show up in the search if it is FDIC-insured. Banks that are insured also should have the FDIC logo on their front door and elsewhere in the bank.

Each FDIC-insured bank also has an FDIC certificate number, which you should be able to get from the bank simply by asking for it. That number can expedite your search on the FDIC website.

Funding Deposit Insurance

FDIC insurance is funded by the banks that are insured. It’s similar to your auto or home insurance—the banks receiving insurance coverage pay a premium for their coverage. Another similarity to other forms of insurance is that the premiums charged are assessed by the riskiness of the bank.

That prevents any single bank from abusing the system and taking unnecessary risks with the expectation that other banks will clean up their mess if they fail. The more risks a bank takes, the more they have to pay for FDIC insurance.

Although it is self-funded through premiums, FDIC insurance is “backed by the full faith and credit of the U.S. government.” The assumption is that the U.S. Treasury would step in if the FDIC insurance fund were to run out of money, but as of September 2020, this scenario has not been tested.

What Else Does the FDIC Do?

In addition to insuring bank deposits, the FDIC oversees activities at many banks and thrift institutions. That oversight is intended to promote a safe banking environment where bank failures are less likely to occur.

When banks do fail, the FDIC doesn’t just protect customer deposits. The agency coordinates the cleanup of the failed institution by finding another bank to take over any remaining deposits and loans.

For most customers, bank failures are relatively uneventful—largely due to the FDIC. While acquisitions and transfers are taking place behind the scenes, customers are unlikely to notice any major disruptions. If the bank goes completely out of business, you may have to get a new account at a different bank, but that would be the only disruption.

The FDIC also provides consumer protection oversight, conducts consumer education, responds to complaints, and examines banks to ensure that they’re following federal laws. These efforts are meant to further inspire confidence in the banking system.

Notable Happenings

The FDIC was created by the 1933 Glass-Steagall Act. Its goal was to prevent bank failures during the Great Depression. After the stock market crashed in 1929, customers rushed to their banks to withdraw their deposits.

The sudden swell of withdrawals further destabilized the already struggling financial industry, and banks that had most of their money in the stock market started falling. They couldn’t give customers back their deposits, and Americans rapidly lost confidence in banks.

So many banks had closed by 1933 that President Franklin D. Roosevelt declared a bank holiday to stop the panic. On March 6, just 36 hours after taking office, he closed all U.S. banks.

During the closure, Congress drafted the Emergency Banking Act, which laid the groundwork for the FDIC, allowed the Federal Reserve to issue currency to support bank withdrawals, and introduced other financial reforms.

Since its creation in 1933, the FDIC notes that “no depositor has ever lost a penny of insured deposits.”

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