The Federal Deposit Insurance Corporation plays a crucial role in maintaining public confidence in the U.S. financial system.
This blog post delves into the:
- Federal Deposit Insurance Corporation’s purpose
- Federal Deposit Insurance Corporation’s rules and regulations
- Federal Deposit Insurance Corporation’s areas/ non-areas of jurisdiction
- Federal Deposit Insurance Corporation’s banking relationships
What is Federal Deposit Insurance Corporation (FDIC)?
The Federal Deposit Insurance Corporation is an independent agency of the United States government that provides deposit insurance to depositors in U.S. commercial banks and savings institutions. Its primary purpose is to protect depositors by insuring deposits, thereby maintaining stability and public confidence in the nation’s financial system.
As per the federal law, government requires most banks to keep only 10% of all deposits on hand, meaning the other 90% can be used to make loans. In other words, if you made a $1,000 bank deposit, your bank can actually take $900 from that deposit and use it to finance a car loan or a home mortgage.
When Was It Created and Why Was It Formulated?
The Federal Deposit Insurance Corporation was created in 1933 in response to the thousands of bank failures that occurred during the Great Depression. Most of these closures resulted from a run on the bank; banks did not possess enough money in their vaults to meet depositors’ withdrawal demands, so they had to close their doors, leaving many families without their savings.
The Banking Act of 1933 established the Federal Deposit Insurance Corporation to restore trust in the American banking system by providing deposit insurance and regulating banks to ensure sound banking practices.
Prior to 2006, the FDIC financed itself through the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). These were basically composed of insurance premiums the FDIC charged to member banks for housing and safekeeping their funds.
In 2005, President George W. Bush signed the Federal Deposit Insurance Reform Act to merge the competing funds. Since then, all premiums are left in the Deposit Insurance Fund (DIF), from which all FDIC-insured deposits are covered.
What are the Rules and Regulations of Federal Deposit Insurance Corporation (FDIC)?
The Federal Deposit Insurance Corporation’s rules and regulations are designed to ensure the safety and soundness of the banking system. Key regulations include:
- Deposit Insurance: It insures deposits up to $250,000 per depositor, per insured bank, for each account ownership category.
- Bank Supervision: The FDIC examines and supervises financial institutions for safety, soundness, and consumer protection.
- Resolution Authority: The FDIC has the authority to manage the resolution of failed banks.
How Does Federal Deposit Insurance Corporation Perform Its Functions?
The FDIC performs its functions through:
- Insurance: Providing deposit insurance to protect depositors.
- Make new loans: Modern bank accounts are not like safe deposit boxes; depositor money does not go into an individualized vault drawer to wait idly until future withdrawal. Instead, banks funnel money from depositor accounts to make new loans in order to generate revenue from the interest.
- Supervision: Conduct regular examinations of banks to ensure compliance with laws and regulations.
- Resolution: Managing the orderly closure of failed banks to protect depositors and maintain stability.
What Areas of the Financial System Come Under Its Jurisdiction?
The Federal Deposit Insurance Corporation’s jurisdiction includes:
- Insured Depository Institutions: FDIC insurance only protects “deposit products,” including (a) Checking and Savings accounts, (b) Time deposits, e.g CDs, (c) Official payments issued by covered banks, including cashier’s checks, and money orders. Applied to Banks and savings associations that are insured by the Federal Deposit Insurance Corporation. Basically, all demand-deposit accounts that become general obligations of the bank are covered by the FDIC. The type of accounts that can be FDIC-insured include negotiable orders of withdrawal (NOW), checking, savings, and money market deposit accounts, in addition to certificates of deposit (CDs).
- Credit Union Accounts: Credit union accounts may also be insured for up to $250,000 if the credit union is a member of the National Credit Union Administration (NCUA).
- Consumer Protection: Enforcing consumer protection laws related to banking.
What Areas of the Financial System Do Not Come Under Its Jurisdiction?
The FDIC does not cover:
- Investment Products: Stocks, bonds, mutual funds, and other investment products are not insured by the Federal Deposit Insurance Corporation.
- Safe Deposit Boxes: Under the regulations, these do not qualify for FDIC coverage.
- Credit Unions: These are insured by the National Credit Union Administration (NCUA).
What Kind of Accounts Do Banks Have with Federal Deposit Insurance Corporation?
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.
Banks maintain deposit insurance accounts with the FDIC to ensure that their customers’ deposits are protected. These accounts are subject to the FDIC’s insurance limits and regulations.
At first the insurance limits used to be set at $100,000. Then, during the 2008 financial crisis, the Federal Deposit Insurance Corporation temporarily raised the limit to $250,000 per account ($500,000 per joint account). In 2010, the Dodd-Frank Wall Street Reform Act made the $250,000 limit permanent.
Requirements for Banks to Open Accounts with Federal Deposit Insurance Corporation
Banks have Federal Deposit Insurance Corporation insured account. To obtain Federal Deposit Insurance Corporation insurance, banks must:
- Apply for Membership: Submit an application to the FDIC.
- Meet Capital Requirements: Maintain adequate capital levels as per regulatory standards.
- Insurable Amount: The maximum insurable amount in a qualified account is $250,000 per depositor, per FDIC-insured bank and per ownership category.
- Comply with Regulations: Adhere to FDIC rules and regulations.
History of Major Events at Federal Deposit Insurance Corporation
- 1933: Establishment of the Federal Deposit Insurance Corporation (FDIC) as part of the Banking Act of 1933.
- 1980s: Savings and Loan Crisis, leading to increased regulatory oversight.
- 2005: President George W. Bush signed the Federal Deposit Insurance Reform Act to merge the competing funds. Since then, all premiums are left in the Deposit Insurance Fund (DIF), from which all FDIC-insured deposits are covered.
- 2008: Financial crisis, resulting in the Federal Deposit Insurance Corporation’s expanded role in managing bank failures. As a result of this, Congress increased the amount covered by FDIC deposit insurance from $100,000 to the current $250,000.
- 2010: the Dodd-Frank Wall Street Reform Act made the $250,000 limit permanent.
What Other Government Institutions Work Closely with Federal Deposit Insurance Corporation (FDIC)?
The Federal Deposit Insurance Corporation collaborates with several government institutions, including:
- Federal Reserve: Works on monetary policy and bank supervision.
- Office of the Comptroller of the Currency (OCC): Regulates national banks.
- Consumer Financial Protection Bureau (CFPB): Focuses on consumer protection.
How Federal Deposit Insurance Corporation Handles Bank Failures
When a bank fails, the Federal Deposit Insurance Corporation steps in to protect depositors by:
- Paying Insured Depositors: Ensuring depositors receive their insured funds.
- Managing Receivership: Selling the bank’s assets and settling its debts.
Top 20 Major US Banks with Federal Deposit Insurance Corporation Membership
- JPMorgan Chase Bank
- Bank of America
- Wells Fargo Bank
- Citibank
- U.S. Bank
- PNC Bank
- Truist Bank
- Goldman Sachs Bank USA
- TD Bank
- Capital One
- HSBC Bank USA
- Fifth Third Bank
- Morgan Stanley Bank
- Citizens Bank
- Regions Bank
- M&T Bank
- KeyBank
- BMO Harris Bank
- Huntington National Bank
- Ally Bank
Summary
The Federal Deposit Insurance Corporation is a cornerstone of the American banking system, providing essential deposit insurance and maintaining stability through regulation and supervision. While it covers a wide range of banking activities, it does not extend to investment products or credit unions. The FDIC’s collaboration with other government agencies ensures a comprehensive approach to financial oversight.
Frequently Asked Questions
Q1: What is the maximum amount insured by the Federal Deposit Insurance Corporation?
A1: The FDIC insures deposits up to $250,000 per depositor, per insured bank, for each account ownership category.
Q2: Does the FDIC insure investment products?
A2: No, the FDIC does not insure stocks, bonds, mutual funds, or other investment products.
Q3: How does the FDIC handle a bank failure?
A3: The FDIC pays insured depositors and manages the receivership process to sell the bank’s assets and settle its debts.
Q4: Are credit unions covered by the FDIC?
A4: No, credit unions are insured by the National Credit Union Administration (NCUA).