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What Is the FDIC? Why Was It Created?
The Federal Deposit Insurance Corp., otherwise known as the FDIC, was forged in the aftermath of the Great Depression by President Franklin Delano Roosevelt, as part of a national financial industry reform initiative.
The agency's famous tagline is familiar to anyone in the banking industry—FDIC insurance is backed by the full faith and credit of the United States government.
Roosevelt's administration launched the agency in 1933 to protect bank depositors from losing money with failing banks. On a broader scale, the FDIC was designed to restore trust among the populace in the U.S. banking system after the Depression. The immediate primary goal was to keep Americans from raiding their bank accounts and withdrawing money in toxic economic times.
There's no question that depressions are intrinsically tied to bank panics. That was especially the case after the stock market crash of 1929, at the start of the Great Depression. Americans saw the handwriting on the wall and weren't going to take a chance on losing all of their savings as a series of bank failures arose as the Depression gained strength.
You really can't blame Main Street Americans for their mistrust in the nation's financial institutions.
In the 1920s, the U.S. saw an average of 70 banks collapsing on an annual basis. While that figure is alarming on its own, the number of failed banks reached 744 in the 10 months immediately following the start of the Great Depression.
Overall, 9,000 U.S. banks fell during the 1930s, with 4,000 financial institutions shutting down in 1922 alone—the year Roosevelt rolled out the FDIC. By the end of that year, $140 billion in U.S. bank deposits were lost, signaling the need for the federal government to step in and solidify trust in the nation's banking system.
That's what the FDIC started doing in 1933, and that's what the agency has been doing for the past 86 years, as Americans—despite a legitimate scare in 2008 and 2009—regained a stronger measure of trust in banks and credit unions.
How Is the FDIC Structured?
The FDIC was also forged from the Banking Act of 1933 and signed into law by President Roosevelt. It's managed by a five-member board of directors, who are appointed by the U.S. president and approved by the U.S. Senate. By federal mandate, no more than three board members can be from the same political party.
The Act, which became more commonly known as the Glass-Steagall Act (it was named so because the bill's two primary Congressional sponsors, U.S. Senators Carter Glass (D-Va.) and Henry Steagall (D-Ala.), included a host of government relief programs that were designed specifically to get America's financial system back on its feet after the depression.
One of those programs was the FDIC, which not only walled off commercial and investment banks from one another, it also insured consumer bank deposits of $250,000, using funding measures from banks within the U.S. financial system.
Passage wasn't easy, as major financial interests lobbied against reform.
Specifically, bigger banks weren't thrilled with the prospect of subsidizing smaller financial institutions, especially with the Great Depression and its host of bank failures, so close in the rear-view mirror. But the measure proved so popular with Main Street Americans, it eventually wound its way through Congress, as part of the Banking Act of 1933.
The public knew what it was supporting.
According to government data, since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.
What Does the FDIC Do?
The FDIC's mission hasn't changed 86 years later, but its structural model and responsibilities have changed significantly.
Today, the agency insures U.S. consumer bank deposits for up to $250,000 per depositor (if you're not sure how much of your own money is insured, Uncle Sam can help with the FDIC's Electronic Deposit Insurance Estimator, which calculates the amount of cash you have insured in U.S. financial institutions.)
In real-world terms, the FDIC insurance policy bends the rules in favor of the consumer.
For example, if a banking customer has $189,000 in principal deposits at a financial institution, and has a money market account that has accrued $5,000 in interest, the entire $194,000 is insured by the FDIC—principal and interest.
If the banking customer had $245,000 in principal deposits, and $10,000 in accrued interest, the entire amount isn't covered, as it exceeds the $250,000 insurance threshold established by the FDIC for single-deposit customers (the consumer would be out $5,000 in that scenario.)
When a bank or credit union fails, the FDIC is chartered to act right away to protect consumers. Banks and thrifts that fail are examined by either state regulators or the U.S. Office of the Comptroller—both of which have the power mandated by the federal government to close a financial institution.
If that happens, the FDIC can sell a financial institution's assets (usually deposits, loans and investments) to another bank, thrift or credit union, which immediately assumes the customers are left holding the bag after a bank failure. That exchange of asset ownership is designed to be seamless—bank customers assume their relationship with the new financial institution, most of them with their assets intact.
The FDIC does have some oversight responsibilities, as well.
The agency regularly tests banks for compliance on consumer protection mandates. That oversight includes regulating the Fair Credit Billing Act, the Fair Credit Reporting Act, the Truth-In-Lending Act, the Fair Debt Collection Practices Act, and the Community Reinvestment Act, among other laws.
The FDIC does have insurance protection limits. The agency does not insure consumer-owned stocks, bonds, mutual funds, commodities and other investment-oriented vehicles.
How Are Consumers Protected By the FDIC?
Main Street Americans don't need to take major steps to have their deposits covered by the FDIC.
Once you deposit money at an FDIC-insured bank, your deposit is covered, right up to the $250,000 maximum limit.
The FDIC has a helpful tool to establish if your bank or credit union is FDIC-insured called FDIC BankFind. Just go to the web site, plug in the bank's name, address and web address into the online finder and you'll get an immediate response.
You can also call the FDIC at 877-275-3342 or ask a bank customer service representative who can tell you the institution's FDIC status. Many banks also have the FDIC logo clearly placed on bank signs inside and outside the bank, for easy confirmation.
What’s the Takeaway on the FDIC?
Banks still fail on a regular basis, so the FDIC remains a necessary bulwark against heavy consumer deposit losses in the event a financial institution goes under.
That protection has, over the decades, fostered a robust layer of trust with the banking public, who don't need to be reminded of how precarious the financial sector can be in a time of economic crisis.
With up to $250,000 of their bank deposit money insured, consumers know they have some defense against bank failures—an insurance policy that may just come in handy one of these days.
