When you deposit money into your bank account, it’s easy to assume that your money will always be there for you whenever you need it. Like when you need to pay rent at the beginning of the month, or when you want to order some takeout for a night in. But what if you went to withdraw your money and the bank told you that it was gone?
During the Great Depression, hoards of people anxious about the failing economy rushed to banks to withdraw their cash, worried that their money would disappear and they would have no way to get it back. As thousands of banks failed throughout the 1930s, millions of people saw their savings accounts vanish. The Federal Deposit Insurance Corporation (FDIC) was created to not only ensure that this scenario doesn’t happen again, but to also pay you back in the event that it does.
In 1934, the FDIC provided depositors with $2,500 in coverage (roughly $50,000 today, adjusted for inflation). This number has increased over the years, as the cost of living has risen. The limit was temporarily increased following the 2008 financial crisis, and in 2010, legislation was passed that permanently increased the limit to $250,000.
Here’s what FDIC insurance means for your money in modern times.
What does the FDIC do?
The primary purpose of the FDIC is to give you the peace of mind that your money is safe, and to make sure that financial institutions don’t engage in activities that would compromise your money’s safety. It does this by insuring deposits of member financial institutions up to the legal limits, which today is at least $250,000, thereby guaranteeing that your money will be available to you should your bank fail or run out of money.
Before allowing a financial institution to be a member, the FDIC inspects banks to ensure that they are not engaging in risky behavior, and then continues to monitor activity moving forward. More recently following the 2008 financial crisis, the FDIC also gained the power to liquidate and close down failing financial firms.
What accounts are insured by the FDIC?
Accounts that are insured by the FDIC are deposit products, or financial accounts that allow you, the account holder, to both deposit and withdraw your money. These include:
- Checking accounts
- Savings accounts
- Money market deposit accounts
- Certificates of Deposit (CD)
- Negotiable Order of Withdrawal accounts
How is the FDIC funded?
So, when banks fail, where does the FDIC get money to return deposits to customers? Financial institutions covered by the FDIC are required to pay into the Deposit Insurance Fund (DIF) on a sliding scale based on how much money they have, and how risky their investments are. The FDIC determines these rates, or assessment bases, and adjusts them to maintain the DIF.
There are two ways for the FDIC to rebuild its fund: By suing officers and directors of failed banks, or by raising its assessment bases to require banks to pay greater amounts into the fund. The FDIC is also authorized to borrow up to $100 billion from the U.S. Treasury—an amount that has grown steadily since 1933 and was temporarily increased to $500 billion from 2009 to 2010—but so far, the FDIC has never taken a loan.
What happens when banks fail?
If your bank were to fail, the FDIC would either put the amount of your insured funds into an alternative account with a new member bank that has agreed to take over the account, or they would issue you a check directly, normally within a few days of the bank closing. Remember that this is only the case for funds up to the legal limits.
The next question you’re probably asking is: What happens if you have more than the insured limit in your account? In this case, the FDIC may still be able to help. If the FDIC is able to find a financial institution willing to buy the additional uninsured money, then you could still get a portion of these funds back. However, it is very important to emphasize that even if another institution offers to step in, it could take years to finalize and there is absolutely no guarantee that you would get any money.
The Big Picture: What is the FDIC?
Especially in times of economic uncertainty, we’re all looking for ways to feel more secure. If your money is in an account that is insured by the FDIC, such as a Simple Checking or High-Yield Account, you can rest easy knowing that the money you put in (up to the legal limit) will still be there, even if the economy is in the flux.
This blog post is a general overview of the FDIC. The FDIC is subject to coverage limits and rules not specifically covered in this article. For more information, visit www.FDIC.gov/deposit, or if you have specific questions, we recommend you consult with a certified financial planner.
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