The Federal Deposit Insurance Corporation (FDIC) is a government entity created by the Glass-Steagall Act of 1933, and its purpose is to protect savers from losing their deposits in banking institutions if the bank becomes insolvent.
FDIC insurance only covers certain types of assets, up to certain limits for each person, and only at member banks. FDIC insurance will “make whole” any deposit amount up to $250,000 per person if the banking institution that held the funds declares insolvency. Most banks are members of the FDIC program, which was established by the Federal government in the 1930s.
The scary thing about banks is that they are able to lend out up to 90% of the funds that they take in, which essentially creates money that may or may not really exist, depending on how you look at it. If there is a “run” on the bank, as in the famous scene in the classic film It’s a Wonderful Life, the bank will not have enough assets to give everyone their money back.
There are less dramatic ways that a bank can become insolvent, of course. At any rate, FDIC protects the bank’s customers — the “savers” in particular — from suffering due to bad choices made by the bank.
Banks pay premiums for the FDIC insurance coverage, which, instead of going to a separate FDIC entity, actually exists as a line in the Treasury Department accounting books. The insurance is not funded by tax dollars.
Since the financial crisis of 2008, the capital requirements of banks have become subject to new international regulations known as the Basel Accords.
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