What is federal deposit insurance?
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the federal government that provides deposit insurance to banks and savings institutions.
Why the FDIC was created
If a bank fails, the FDIC will pay depositors back the insured amount. The amount of insurance coverage offered by the FDIC has increased over the years, from $2,500 in 1934 to $250,000 (per depositor) in 2008, to keep pace with inflation and changes in the banking industry.
The FDIC was created in 1933 during the Great Depression to restore public confidence in the banking system and prevent bank failures.
At the time, many banks in the United States were failing due to a combination of factors, including bank runs, widespread unemployment, and a decline in agricultural and industrial production. This led to a loss of public trust in the banking system, with many people withdrawing their money from banks and keeping it at home.
To address this crisis, the US Congress created the Federal Deposit Insurance Corporation (FDIC) as an independent agency of the federal government. The FDIC's main purpose was to provide deposit insurance to banks and savings institutions in order to protect depositors' funds in case their bank failed. The FDIC also worked to regulate and supervise banks to ensure their safety and soundness.
The creation of the FDIC was a crucial step in restoring public confidence in the banking system and preventing future bank failures.
2023 Recent Bank Failures
Silicon Valley Bank (SVB)
On Mar. 10, 2023, the Federal Deposit Insurance Corporation (FDIC) declared Silicon Valley Bank (SVB) to be insolvent, resulting in its closure. This marks the most significant U.S. bank failure since the 2008 Financial Crisis. SVB's total assets as of late 2022 were reported at $209 billion with total deposits amounting to $175.4 billion. The Federal Deposit Insurance Corporation (FDIC) will assume control of the bank and make deposits up to $250,000 available to customers.
The FDIC may be in the process of finding another bank to take on all or a portion of the SVB's assets. This option would ensure depositors are minimally disrupted and usually kept whole.
How is the FDIC Funded?
The FDIC is primarily funded through insurance premiums paid by the banks and savings institutions that it insures. These premiums are based on the amount of deposits that a bank holds, as well as its risk profile and the cost of the FDIC's operations.
In addition to insurance premiums, the FDIC may also charge banks for special assessments in certain situations, such as when there are significant bank failures or when the FDIC needs to raise additional funds to maintain its required reserve ratio.
The FDIC also earns income from its investments, such as the interest earned on the US Treasury securities that it holds as part of its reserve fund. The reserve fund is used to pay out insured deposits in the event of bank failures and must be maintained at a certain level relative to insured deposits.
The FDIC is not funded by taxpayer dollars, but it does have a line of credit with the US Treasury that it can use in the event of a major banking crisis.
What happens if you go over the FDIC insurance limit?
If you have more money in a bank than the FDIC insurance limit, you run the risk of losing any amount above the insured limit in the event that the bank fails. This means that you could potentially lose a portion of your deposits that exceed the FDIC insurance limit.
For example, if you have $300,000 in a savings or checking account and the bank fails, you would be insured for up to $250,000 by the FDIC. This means that you would lose the remaining $50,000 that is not covered by FDIC insurance. However, there are ways to insure your money beyond the FDIC's $250,000 limit.
Here are a few options when you have more than $250,000:
- Spread your deposits across multiple FDIC-insured banks; and that includes FDIC-insured online banks. The FDIC insures deposits that a person holds in one insured bank separately from any deposits that the person owns in another FDIC-insured bank.
- Open an account with a credit union. Credit unions are not FDIC insured, instead, credit unions are insured by the National Credit Union Administration (NCUA), which is an independent federal agency that insures credit union members' deposits up to $250,000 per account, per federally insured credit union.
- Invest your money in other types of assets. Stocks and bonds can be used to diversify your holdings and reduce your reliance on bank deposits.
- Depositors Insurance Fund (DIF). If your bank is a DIF member, they will insure deposits in excess of the $250,000 FDIC limit.
- Cash Management Account. Most brokerages offer cash management accounts for investors to have quick and easy access to cash for investing and checking account purposes. Brokerages are nonbank financial institutions but the cash management accounts are FDIC-insured for much higher limits.
- Open Certificate of Deposit (CD) Accounts. CDs are a type of savings account offered by banks and credit unions that typically offer higher interest rates than regular savings accounts. The FDIC-insured Certificate of Deposit Account Registry Service (CDARS) makes it possible for investors to invest up to $5 million in CDs without having to worry about the FDIC’s $250,000 limit per individual bank. With CDARS, deposits are split into multiple CDs held at different member banks, which are then protected by the FDIC insurance limit.
Today, the FDIC remains an important part of the US financial system and helps to promote stability and confidence in the banking industry.