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A primary goal of the Federal Deposit Insurance Corporation, or FDIC, is to make sure you feel comfortable depositing your money in a bank.
When you deposit money into a savings or checking account, you want to trust that those funds will still be there when you need to use them. During the financial crises of the late 19th and early 20th centuries — before the 1933 formation of the FDIC — depositors could lose their money if banks and thrifts failed.
What is a thrift?
A thrift is a financial institution that often specializes in home mortgages and consumer loans but can also offer the same array of financial products as commercial banks. Also called savings and loan associations, thrifts can offer familiar financial products like savings accounts, time deposits, and consumer and commercial loans.
Unlike banks, thrifts can face statutory lending limits that can limit their lending capacity. Thrifts have become increasingly uncommon in recent decades. According to the FDIC, it insures just 726 thrifts compared to 4,880 commercial banks insured, according to data from March 2018.
Read on for a look at how the FDIC works, a brief history of the agency, and why it could matter to you.
How does the FDIC work?
The FDIC promotes confidence in the banking system by insuring deposits in financial institutions and then monitoring those financial institutions to ensure their behavior isn’t too risky. If an FDIC-insured institution fails, then the FDIC steps in to protect insured funds.
When a failure occurs, the FDIC takes one of two steps. The first option is to set up the insured accounts with a new bank or thrift in the same amount that was insured at the failed bank. For the second option, the FDIC will issue the depositor a check for the insured amount to reimburse the depositor directly, up to a limit of $250,000 per covered account.
The account holder should receive the new account or payment covering the insured accounts within a few days after the financial institution closes, usually the next business day. But if the account’s balance is more than the insured amount of $250,000 or the account holder otherwise has uninsured funds, then the account holder may receive some portion of the uninsured funds if the FDIC finds a buyer for the bank’s assets.
Unfortunately, it can take several years to sell the assets of a failed bank, and there’s no guarantee of how much a depositor will receive after the fact. If you have more than $250,000 with a single FDIC-insured bank, a way to help guard against losing part of your money during a bank failure is to hold no more than $250,000 in any single insured account category. Take a look at the FDIC account category tool for a breakdown of covered categories.
Banks and thrifts are required to pay risk-based insurance premiums to the FDIC and the FDIC commonly conducts examinations of banks and thrifts. The monitoring that these banks undergo makes it more difficult to engage in risky behavior, which means fewer banks fail while under FDIC protection.
What kinds of accounts are FDIC-insured?
The FDIC does not insure every type of financial account you can open at a bank. This table can be helpful to determine which types of deposits are covered at FDIC-insured banks, and which aren’t.
|Covered by the FDIC||Not covered by the FDIC|
|Negotiable Order of Withdrawal accounts||Mutual funds|
|Money market deposit accounts||Life insurance policies|
|A time deposit like a certificate of deposit||Annuities or municipal securities|
|An official item issued by the bank, such as a money order or cashier’s check||Safety deposit boxes (and their contents)|
Don’t worry if this list seems complicated. Just make sure you’re clear on which of your current accounts are insured, and pay attention in the future if you choose to open more.
How to find out if a bank is insured
As of March 2018, the FDIC insures more than 5,600 commercial banks and thrifts. But how can you find out if your bank is insured?
The good news is that it shouldn’t take much digging. If your bank or credit union is FDIC insured, you can typically find an “FDIC” sticker near the front entrance or teller counter.
If you can’t go into the bank’s physical location, or just can’t track down that sticker, you can always call the bank and ask. Another option is to call the FDIC at 1-877-275-3342 or use its online BankFind tool.
A brief history of the FDIC
Before FDIC protection, depositors risked serious losses in the event of bank failure. In fact, according to the FDIC, between 1930 and 1933, depositors lost a total of about $1.3 billion — around $24.5 billion in today’s dollars — as the result of bank failures.
In response, Congress created an independent agency to supervise and insure banks and thrifts with the goal of bringing some security to the rollercoaster that was the U.S. banking system. FDIC insurance coverage began on January 1, 1934, and no depositor has lost a cent of insured funds as result of a bank failure since.
While much that the FDIC does goes unnoticed, the agency played conspicuous roles during the savings and loan (S&L) crisis of the 1980s and the financial crisis of 2008.
The savings and loan crisis
Mostly used for savings accounts and home mortgages, S&Ls were previously regulated by an organization called the Federal Home Loan Bank Board and insured by the Federal Savings and Loan Insurance Corporation.
As such, S&Ls weren’t subjected to the same regulations as commercial banks, a situation that may have been a factor that led to a crisis in 1980, when S&Ls began losing money because of a number of factors, including traditionally weaker oversight from the Federal Home Loan Bank Board, changes in the industry and rising interest rates.
By 1983, the tangible net worth of the entire S&L industry was almost zero. In 1989, President Bush proposed a bailout of the S&L industry, which terminated the Federal Home Loan Bank Board and gave the FDIC authority over deposit insurance.
The 2008 financial crisis
With the entire financial system at risk of collapse during the 2008 financial crisis — the origins of which can be traced back to the housing market and weakened subprime-mortgage-lending practices — the FDIC was tasked with a number of different, but intersecting, challenges.
On one hand, the FDIC was charged with restoring financial stability by reimbursing depositors at failed insured banks. Additionally, the FDIC decided to increase payments from institutions to manage the Deposit Insurance Fund to help ensure that it too could remain intact. These efforts arguably helped to stabilize the banking system and limit some of the impact of the crisis.
Why is the FDIC important?
When you deposit money, many banks don’t actually hold on to your cash until you decide you want a latte. It may use your deposit to make loans and other investments that can, in turn, make the bank money.
This system can be great for the bank and theoretically makes no difference to you — until, that is, the bank makes some bad investments and loses enough money that it can’t afford to give depositors their money back when they go to withdraw their funds.
FDIC-insured banks are monitored and examined to ensure they are managing risk appropriately and avoiding behavior that could put depositors’ money at risk. In the event that an FDIC-insured bank suffers a disastrous event — like many did when risky lending led to the widespread collapse of financial institutions in 2008 — the FDIC can step in and help out. Effectively, the FDIC uses its funds — held in the DIF, or Deposit Insurance Fund — to help ensure that depositors don’t lose theirs.
But if the bank isn’t insured, there probably isn’t an established safety net. So if an uninsured bank fails, that cash will likely only be available on a first-come, first-serve basis and there’s little chance you’ll see more than a fraction of it back. Making sure your bank is FDIC-insured can help protect your money.
FDIC insurance doesn’t protect against all problems you might have with a bank, but it at least keeps you from losing the insured money you entrusted to it in the first place, as long as the bank is insured.
The Federal Deposit Insurance Corporation protects depositors’ insured money and helps to keep the financial system running as a whole. The best evidence of the agency’s effectiveness is its record — no depositor has lost a penny of their insured deposits since the FDIC was formed in 1933.
If you want to maximize your chances of keeping your money safe, you should look for a bank and account insured by the FDIC.