If you go to a bank and look at its paperwork or visit a bank’s website, you’ll probably see the words “Member FDIC” somewhere. You might be curious what that really means and what the FDIC is all about.
The Federal Deposit Insurance Corporation (FDIC) is a government agency that oversees banks and the banking industry, helping protect everyday people from failures in the banking system.
How Does the FDIC Work?
The FDIC is an independent government agency that is involved in the banking industry. The FDIC’s primary task is to provide deposit insurance to its member banks, protecting depositors in the event that the bank fails.
Most banks in the US are members of the FDIC.
Note: Credit unions function like banks, but are not banks, so they are not covered by the FDIC. Instead, they are insured by the National Credit Union Administration (NCUA) or by state agencies that offer similar protections to depositors at credit unions.
On top of offering deposit insurance, the FDIC is involved in regulatory oversight. They watch over banks to ensure they are following all legal requirements and complying with consumer protection laws, like the Fair Credit Billing Act and the Truth in Lending Act. These laws ensure that banks use fair practices when offering loans to customers.
In short, the FDIC is a government group that protects everyday people from malicious or negligent actors in the banking industry.
What is FDIC Insurance and What Does it Cover?
One thing that many people are familiar with, or have at least heard of, is FDIC insurance. This deposit insurance is one of the primary services the FDIC offers and helps to protect consumers in the event that a bank fails.
The FDIC offers insurance on the following types of accounts:
- Savings accounts
- Checking accounts
- Certificates of deposit
- Money market accounts
- Money orders
- Cashier’s checks
- Other official items issued by banks
FDIC insurance offers up to $250,000 per depositor, per account ownership category, per insured bank. Ownership categories include:
- Single accounts
- Joint accounts
- Retirement accounts
- Revocable trust accounts
- Corporation, partnership, or unincorporated association accounts
- Irrevocable trust accounts
- Employee benefit plan accounts
- Government accounts
What that means is that if you deposit money at a bank and that bank is later unable to return those funds to you, the FDIC will step in and reimburse you for the amount lost, up to the $250,000 limit.
Note: Investment accounts holding stocks, bonds, and other securities are not FDIC insured, even if they are held through your bank. If your broker or bank fails you still own those securities and you can shift them to another account.
What Happens When a Bank Fails
When a bank fails and is unable to return depositor money, the FDIC steps in to help deal with the situation.
Bank failures are exceedingly rare. There were only 4 bank failures in 2020 and none at all in 2021. However, despite their rarity, they can still happen.
When a bank fails, the first thing the FDIC does is to try to complete the bank’s acquisition by another bank. For example, if Bank ABC failed, the FDIC may help Bank XYZ acquire it. If the acquisition goes through, everyone with accounts at Bank ABC now has accounts at Bank XYZ. They never lose access to their funds and simply have to start working with a new institution.
If the FDIC is unable to find another bank willing to acquire the failed one, it steps in and pays depositors directly. Customers of the failed bank can then open accounts at another bank of their choice.
Maximizing FDIC Insurance
Recall that FDIC insurance protects up to $250,000 per depositor, per ownership category, per bank.
If you’re in a fortunate enough position to have more than $250,000 to put in a bank account, you can receive more than $250,000 in protection with careful planning.
If you’re married, you and your spouse could each open an individual account, receiving $250,000 in insurance on each. If you then open a joint account together, you’d each receive an additional $250,000 of insurance for funds in the joint account for a total of $1 million in insurance.
If you’re not married or don’t want to use joint accounts, you can simply open accounts at multiple different banks. You receive $250,000 in coverage per bank. As long as you keep the balance in each account below that level, you’ll receive full protection.
Why Does the FDIC Exist?
The FDIC was created in 1933 to help build trust between consumers and the financial system.
Before the FDIC, depositors had no protection. If a bank failed, depositors lost their money. As a result, any rumor of trouble sent depositors rushing to withdraw their money. This often turned a rumor into an actual bank failure, as banks didn’t have enough cash to meet the withdrawals. Bank failures were common occurrences for many years.
The stock market crash of 1929 and the ensuing depression led to thousands of bank failures. As more banks failed, people rushed to take money out, which caused further bank failures. The cycle continued feeding itself and bank failures escalated.
Eventually, President Franklin D. Roosevelt declared a four-day bank holiday in March 1933 and signed the Banking Act of 1933 in June, creating the FDIC.
By protecting depositors against losses from bank failures, the FDIC helped instill confidence in the banking system and reduce the prevalence of bank runs, which are now virtually unknown. That, in turn, helped reduce the rate of bank failure.
What is a Bank Run?
A bank run occurs when many people go to a bank to withdraw money from their accounts. Typically, this happens due to fear that the bank is about to run out of money and fail. They’re named because crowds will run to the bank to make withdrawals.
Banks in the US operate using a fractional-reserve system. That means that banks only keep a fraction of the money deposited on hand. If a bank’s customers have deposited a total of $1 million, it may only keep $50,000 in the bank at any one time. The rest is lent out to help the bank generate income.
In general, the fraction the bank retains is sufficient to handle daily withdrawal requests and other typical business. However, when a bank run occurs, customers try to withdraw more than the bank has available, leading to the bank being unable to return all of its customers’ deposits.
Prior to the founding of the FDIC, bank deposits were not insured. If a bank failed, customers could lose some or all of the money they had deposited. This made bank runs far more common as people tried to recover their cash before their bank collapsed. These runs significantly contributed to bank failures during the Great Depression.
The FDIC has largely made bank runs a thing of the past because depositors are confident that their money isn’t at risk, even if their bank fails.
Other Post-Depression Changes to the Financial System
The formation of the FDIC is just one of the major changes that occurred in the wake of the Great Depression to help stabilize and strengthen the American financial system. These other changes also helped increase consumer confidence in the financial system and improve the economy.
The Minimum Wage
The Roosevelt Administration first attempted to enact a minimum wage in 1933, only for the law to be struck down by the Supreme Court. In 1937, the court overturned its precedent, upholding the constitutionality of a Washington state law establishing a minimum wage.
In 1938, the Fair Labor Standards Act set the minimum wage at 25 cents an hour, equivalent to just under $5 an hour in 2022. Initially, the law only applied to “employees engaged in interstate commerce or in the production of goods for interstate commerce.”
In 1961 and 1966 it was extended to larger retail and service businesses before changes in 1990 made it apply to almost all workers nationally. The current federal minimum age is $7.25, though many states have increased their minimum wages. At the time of writing, Washington D.C. has the highest minimum wage at $16.10, followed by California at $15.
Early in the 20th century, unions and some employers in the US began establishing unemployment insurance programs, but these only covered small portions of the workforce. The first large unemployment insurance program was established in 1932 by Wisconsin. It offered workers in the state 50% of their typical wages for 10 weeks after the loss of their job.
Other states began similar programs after the 1935 Social Security Act established a federal payroll tax to fund state-based unemployment programs.
This program served to help workers who lost their jobs while they searched for a new source of income.
The Social Security Act was signed in by President Roosevelt in 1935. On top of established unemployment insurance taxes, it included Aid to Dependent Children, Old Age Insurance, and Old Age Assistance.
The first payment was issued in 1937 when Ernest Ackerman received a payout of 17 cents. The program helped provide older, retired people with a source of income when they were no longer able to work.
Over time, the program evolved to be the one we know today, offering benefits both to retirees and people with medical disabilities that inhibit their ability to work.
The FDIC is a government agency that was founded in the wake of the Great Depression to help build confidence in the American financial system. Like over Depression-era innovations, it continues to play a major role in the American economy and helps protect everyday people from issues with the financial system.