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What does FDIC Insured mean?

What does FDIC Insured mean?

Understanding FDIC Insured Accounts

FDIC insured accounts offer a significant level of financial security to depositors. Defined as a bank or thrift account protected by the Federal Deposit Insurance Corporation (FDIC), these accounts assure customers of the safety of their deposits in the event of bank failures. Originating from the Glass-Steagall Act of 1933, FDIC is a government entity that aims to safeguard savers' deposits in banking institutions if the bank becomes insolvent.

The concept behind FDIC insured accounts lies in the fundamental banking practice of lending. Banks are authorized to lend up to 90% of the funds they hold, thereby essentially creating money. While this fuels economic growth, it also carries a risk: if many depositors simultaneously decide to withdraw their money, the bank might not have enough liquid assets to repay everyone. This scenario is known as a 'run on the bank,' and it's precisely where FDIC insurance comes into play.

FDIC Insurance: The Ins and Outs

Every FDIC insured account is protected up to $250,000 per person, per FDIC-insured bank, and per ownership category. In essence, the FDIC insurance ensures that any deposit amount up to this limit is made whole if the banking institution that held the funds declares bankruptcy. This insurance, however, does not cover all asset types but is limited to specific ones and only at member banks.

The FDIC program, established by the Federal government in the 1930s, includes most banks as its members. The insurance is financed by premiums paid by these member banks, reflected as a line in the Treasury Department accounting books rather than requiring funding through taxpayer dollars.

FDIC Insurance: A Protective Barrier for Savers

Primarily, FDIC insurance serves to protect the bank's customers, especially savers, from the adverse impacts of flawed decisions by the bank. This protection is of particular importance given that banks can become insolvent in less dramatic ways than a 'run,' such as through poor investment decisions or economic downturns.

Furthermore, the role of FDIC insurance has become even more crucial since the financial crisis of 2008. In its aftermath, banks' capital requirements have become subject to new international regulations, known as the Basel Accords. FDIC insurance provides an additional layer of financial protection to depositors in an increasingly complex and interconnected banking system.

The FDIC Advantage

An FDIC-insured account is a safeguarded bank account where deposits are federally protected against bank failure or theft. The FDIC, a federally backed deposit insurance agency, is funded by member banks' regular premiums, creating a financial safety net for savers. As a depositor, choosing an FDIC-insured bank provides you with an assurance of the security of your funds, regardless of the bank's future stability. It's a testament to the saying: Better to be safe than sorry.

Summary:
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.

What is a Certificate of Deposit?
What is the Federal Savings and Loan Insurance Corporation (FSLIC)?

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