What is the FDIC, and Why Should You Care?

October 2, 2020

What is the FDIC, and Why Should You Care?

As an independent agency of the federal government, the Federal Deposit Insurance Corporation (FDIC) has an important task. It works to keep the national financial system stable. The need for this body was made clear in the wake of the Great Depression.

A Response to Financial Disaster

Congress created the FDIC as part of the Banking Act of 1933. One of the effects of the Depression was the failure of many local banks. As bank customers lost confidence in financial institutions, they started to withdraw their funds. What started as a trickle of customers would turn into a waterfall of requests for immediate cash. Banks could not meet the demand and defaulted on customers’ deposits. Because the deposits were not insured, many people lost their savings. The federal government put the FDIC in place to prevent this from happening again.

Protecting Your Deposits

Since the creation of the FDIC, no depositor has lost insured funds. Currently, the FDIC insures up to $250,000 per covered account category. If you have $250,000 in a checking account and $250,000 in an IRA, the FDIC will cover both accounts. If your bank ever fails, this organization will make certain that you are not left high and dry.

It is important to note that this organization does not protect every type of account a bank may offer. While the agency covers basic checking and savings products, it does not cover stocks, bonds, or mutual funds.

Holding Banks Accountable

Banks that are insured by the FDIC are also subject to oversight by the agency. Since the purpose of the organization is to promote stability, it periodically examines the practices of financial institutions to make certain that they are operating safely. The FDIC also examines whether banks are following consumer protection rules established by the government.

Dealing With Bank Failures

When a bank failed during the Great Depression, its assets disappeared. Depositors lost their money, and creditors could not get back their investments. Banks still fail today. However, with the FDIC maintaining a stable financial system, most consumers are not harmed by the closure.

When an insured bank becomes insolvent, the FDIC steps in to make certain that accounts transfer to another institution. The new bank will notify consumers that their funds are in a new institution, but they will not lose their money. In the meantime, the FDIC distributes the assets of the failed bank to its creditors.

Working Hard in the Background

The FDIC is an institution that most consumers will not think about until there is a crisis. If you want the protection that this agency provides, make certain that your financial institution clearly states that it is insured by the FDIC.

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