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Economy 101: Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation (FDIC) is an independent federal government agency that was created in 1933 after thousands of bank failed during the 1920s and early 1930s. The FDIC insures deposit accounts at more than half of all federally and state-chartered banks and thrifts against failure.

Deposits insured by the FDIC include those held in checking and savings accounts, money market deposit accounts and certificates of deposit (CDs). FDIC insurance does not cover other financial products that insured banks may offer, such as stocks, bonds, mutual fund shares, life insurance policies, annuities or municipal securities – nor does it cover contents stored in safe deposit boxes.

FDIC insurance currently covers up to $250,000 per depositor, per financial institution. Joint account holders (two or more persons) are covered at $250,000 per person, per account. It is important to note that the $250,000 FDIC insurance limit applies cumulatively to all deposits held at any particular institution – different bank branches are considered part of the same bank, as are internet-only banks owned by brick-and-mortar banks, even if their names are different. So, for example, if you have three deposit accounts at one bank and each is worth $100,000, FDIC insurance would cover only $250,000, not the full $300,000. That’s why many investors prefer to open accounts at multiple FDIC-insured institutions to ensure all their deposits are fully insured.

The $250,000 limit is permanent for certain retirement accounts (including IRAs), but is scheduled to return to the former $100,000 limit for all other deposit accounts after December 31, 2013, unless the government enacts new legislation in the meantime.

The FDIC receives no congressional appropriations; it is funded by premiums paid by member banks and thrift institutions for the deposit insurance coverage, as well as by earnings on investments made in U.S. Treasury securities. Although the majority of banks and thrifts belong to FDIC, many do not, so it’s important to verify if the institution is an FDIC member before opening an account.

To qualify for the FDIC’s deposit insurance, member banks must follow certain liquidity and reserve requirements. If a bank is deemed to be undercapitalized (that is, does not have sufficient capital on hand to cover foreseeable risks), the FDIC will issue warnings and, in extreme cases, will declare the bank insolvent and take over its management. The two most common insolvency resolution methods the FDIC employs are:

• Purchase and assumption method (P&A). All deposits are assumed by another, healthier bank, which also purchases some or all of the failed bank’s loans.
• Payout method. If no P&A bid for the failed bank is received, the FDIC will pay out insured deposits to account holders and then attempt to recover its payments by liquidating the bank’s assets.

Incidentally, the equivalent oversight agency governing credit unions is called the National Credit Union Administration (NCUA). It provides insurance comparable to FDIC bank insurance to depositors at all federal and most state-chartered credit unions.