Federal Deposit Insurance Corporation (FDIC)
An insurer of bank deposits
An insurer of bank deposits
The Federal Deposit Insurance Corporation (FDIC) is a government institution that provides deposit insurance against bank failure. The body was created during the Great Depression when the public had lost trust in the banking system. Prior to its formation, a third of the US banks had collapsed leading to the loss of depositors’ funds. There was no guarantee on bank deposits other than the bank’s stability, and only depositors who were quick enough to withdraw their money were lucky enough to retain it. The FDIC was established with the aim of maintaining public confidence in the financial system and promoting sound banking practices.
The FDIC coverage provides deposit insurance of up to $250,000 per ownership category, as long as the institution is a member. Initially, the agency provided insurance limit up to $2,500 until the passage of the Dodd-Frank Wall Street Reform recommended raising the insurance limit. The FDIC only insures banks, while credit unions fall under the National Credit Union Administration. The agency gets funding from the premiums paid by banks for insurance coverage and earnings from its investments in the US Treasury bonds.
The Federal Deposit Insurance Corporation was formed in 1933 following the stock market crash of 1929 that led to the failure of thousands of banks. Investors worried about losing their bank deposits started withdrawing their savings in other banks, and this resulted in the collapse of even more banks after running out of money. Following the crisis, then US President, Franklin Roosevelt, ordered a four-day bank holiday to allow for the inspection of the banks. Later that year, he signed the Banking Act of 1933 that led to the formation of FDIC to restore public confidence in the financial system.
The Banking Act gave the FDIC authority to provide deposit insurance to commercial banks, as well as to supervise and regulate state non-member banks. The institution received an initial loan of $289 million from the US Treasury to kick-start its operations. At its inception in 1933, FDIC maintained the insurance limit at $2,500. The limit was increased gradually to:
The Federal Deposit Insurance Reform Act of 2005 allowed the FDIC Board to consider the effects of inflation every five years beginning in 2010 and adjust the limit under a specified formula. The Act also merged two insurance funds, the Savings Association Insurance Fund (SAIF) and Bank Insurance Fund (BIF) into a new fund, the Deposit Insurance Fund (DIF). The DIF was placed under the maintenance of the FDIC, and this authorized the agency to assess depository institutions and their insurance premiums.
The Board of Directors is the top decision-making body of the Federal Deposit Insurance Corporation. The President of the United States appoints three of the five members of the Board of Directors, and the Senate confirms the appointees. The other two ex-officio members of the Board are the Comptroller of the Currency and the Director of the Consumer Financial Protection Bureau. No more than three members of the FDIC Board of Governors should come from one political party.
The Federal Deposit Insurance Corporation directly supervises more than 4,000 banks to ensure they operate within the law and that the investors’ funds are secured. The agency also acts as the primary federal regulator of banks chartered by state governments but that do not join the Federal Reserve System. It ensures that banks comply with consumer protection laws such as the Fair Credit Billing Law, the Truth-in-Lending Law, Fair Debt Collection Practices Law, and the Fair Credit Reporting Law. Savings, checking, retirement. and other deposit accounts are insured for up to $250,000 per ownership category. However, the FDIC does not insure mutual funds, securities, money market accounts, and bonds.
The FDIC executes its mandate with the help of two components, the Advisory Committee on Economic Inclusion and the Office of International Affairs. The Advisory Committee on Economic Inclusion advises the FDIC on banking policies and initiatives and makes corresponding recommendations. The banking policies include reviewing basic retail financial services such as money orders, remittances, check cashing, stored value cards, and short-term loans. The Office of International Affairs helps the FDIC address global financial challenges that affect the deposit insurance system. It also provides technical assistance and training to foreign deposit insurers and bank supervisors.
Once a bank has been declared insolvent and closed by either the US Office of the Comptroller of Currency or the state banking department, the Federal Deposit Insurance Corporation is appointed as the receiver. As the receiver, the agency is tasked with protecting investor funds and recovering debts owed to the creditors of the failed institution. The functions performed by the FDIC as the receiver are distinct from the agency’s functions as a deposit insurer. A receiver is expected to market the assets of the failed bank, liquidate them, and distribute the proceeds to the creditors. They may collect all money owed to the institution and perform all functions consistent with the appointment.
The FDIC has various options to help solve failed institution’s financial challenges. The most used option is to sell the deposits and loans of the bank to another bank. Depositors of the failed bank automatically become members of the receiving institution and can access their funds this way. Also, as the insurer, the FDIC may pay all the failed bank’s depositors the full amounts of their insured deposits. Depositors with uninsured funds do not receive their full reimbursements immediately. Instead, they are issued with receivership certificates that guarantee them a portion of the receiver’s collection after the liquidation of the bank’s assets. Alternatively, the receiver may decide to set up a new institution to take over the assets and liabilities of the failed bank. The new institution may dispose of the assets and liabilities or pledge them to the FDIC in its corporate capacity.
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