Posted in Finance, Accounting and Economics Terms, Total Reads: 195
Definition: Federal Deposit Insurance Corporation (FDIC)
Federal Deposit Insurance Corporation is an executive US federal agency responsible for insuring deposits against failure of banks. Broadly, it covers deposits by companies/individuals in banks/thrift institutions, supervises the risks against insured funds and limits economic damage upon failure. The Federal Deposit Insurance Corporation, also known as FDIC provides insurance coverage for bank deposits upto $250,000 per institution that is a member firm. Savings, checking, individual retirement accounts(IRAs) and other deposit accounts can be insured, however, securities, mutual funds, stocks, money market accounts, bonds, U.S. Treasury securities, insurance and annuity products, contents of safe-deposit boxes etc. are not insurable. These actions of the FDIC mitigate potential damage to the US economy.
Federal Deposit Insurance Corporation was created in 1933 at the time of a severe banking crisis in US history, during the Great Depression. Widespread bank failures and massive customer losses during the 1930s was the trigger for formation of the FDIC. It was created with the responsibility to insure bank deposits of eligible member firms against loss, and also to regulate countrywide banking practices. Federal Deposit Insurance Corporation is headquartered in Washington DC, and is managed by a five-person Board of Directors, with no more than three being from the same political party, so as to provide balance regarding varied economic viewpoints.
FDIC maintains robust financial stability by providing comprehensive insurance coverage for bank deposits. Most of its employees are bank examiners. It aims to preserve and promote public confidence in the banking and US financial system. In addition, FDIC monitors, identifies and addresses risks to deposited funds while mitigating the economic impact on the financial system upon bank failure.
The FDIC is the primary federal regulator of US banks. Federal Deposit Insurance Corporations oversees over 7500 banks and savings bank institutions which comprise a majority of financial institutions in the US banking system. These are examined and supervised for operational safety and soundness to make sure they are solvent and are compliant. FDIC performs due diligence in scrutinising banking institutions for compliance with consumer protection laws. In addition to the above, it identifies and monitors risks to its own deposit insurance funds.
Funding of the Federal Deposit Insurance Corporation is through premiums paid by participating institutions, banks, thrift institutions and interest earned on US treasury bonds. It is not funded by taxpayer money, nor does it operate on funds from Congress. The standard insurance amount is $250,000 per depositor, per insured institution per category. The initial capital was provided by U.S. Treasury & Federal Reserve banks. FDIC’s income comes from assessments on insured banks, & interest on US treasury securities.
FDIC gives depositors a way out when a bank fails via deposit insurance. It may give loans to insured banks in the interest of protecting depositors. Upon failure of an insured bank, FDIC pays claims upto $100000. FDIC responds immediately in the event of failure of a bank or thrift institution – customer deposits and loans of the failed institution is usually sold to another institution. Current account holders(depositors) of the failed institution automatically become customers of the succeeding institution, this is usually a seamless transition. In extreme cases, FDIC may, after due notice, terminate insured status of a bank engaging in unsafe banking practices.
Federal Deposit Insurance Corporation is also responsible for the Savings Association Insurance Fund (SAIF), which insures deposits in savings and loan associations. FDIC may facilitate mergers/consolidations by lending/purchasing assets when required. It will also prevent closure of specific insured banks when the institution is essential for adequate banking. Federal Deposit Insurance Corporation has collaborated with the US Congress on significant keynote legislative proposals for reforming the deposit insurance industry. Its recent recommendation was to incorporate CPI inflation indexing for the insurance amounts.