Federal Reserve
FDIC-Federal Deposit Insurance
Corporation
One of
the most well known acronyms in banking is the FDIC, though not many
people can recite its full name. FDIC stands for the "Federal
Deposit Insurance Corporation," as it is a corporation created in 1933
through the Glass-Steagall Act. The FDIC was created in response to
the large number of bank failures during the Great Depression so that
there would be a guarantee-based institution for banks, not guaranteeing
deposits in member banks up to $100,000 per depositor. The FDIC was
based on the Commonwealth of Massachusetts' Deposit Insurance
fund.
The History of
the FDIC
During
the Great Depression banks were collapsing under the pressure caused by a
vast number of bank runs. Over 4,000 banks closed their doors, with
an approximate average of $900,000 each. These banks then merged to create
stronger banks, enabling them to return 85 percent of the money to
depositors months later. While it is a myth that people lost all
their money in banks, it is true that the people needed to withdraw the
money to pay bills. Over $6.8 billion dollars were suspended in
9,106 banks from 1929 to 1933, and $1.3 billion was lost to
depositors.
Senator Arthur Vandenberg (R) and
Representative Henry Steagall (D) believed it was important to bring back
the public confidence in banks. By May 1933, the House Banking and
Currency Committee created a bill that insured deposits on a sliding
scale, beginning at $10,000 that year, with banks having to pay a small
fee. Then the Senate Banking Committee offered up a bill that was
similar but excluded banks that were not members of the Federal
Reserve. It was Senator Vandenberg and Representative Steagall that
offered amendments to the bills. Senator Vandenberg's added his
because he believed there had to be a ceiling on guarantees. His
proposal created the amendments that added a temporary fund along with a
$2,500 ceiling. Representative Steagall's amendment added management
to the program through the creation of the FDIC. President Franklin
D. Roosevelt's initial concern over insurance creating irresponsible
bankers was soon quashed by the overwhelming support for the
bill.
The first head of the FDIC was Walter
Cummings, and virtually all of the country's 19,000 banking offices were
involved when insurance began on January 1, 1934. President
Roosevelt's fears were proved founded when his second head of the FDIC,
Leo Crowley, had been using the FDIC to place a veil over his
embezzlement. However, to maintain confidence in the system, the
situation was covered up and not revealed until almost 60 years later
in1996.
FDIC Classifications
The FDIC classifies
member banks based upon their capital ratio, which also determines a
bank's risk. There are basically five categories of member
banks: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. The
well-capitalized banks have 10 percent risk based capital ratio, while
adequately capitalized banks are between 8 and 10 percent. Any bank
under 8 percent is considered undercapitalized, while those under 6
percent are significantly undercapitalized. Once a bank falls under 6
percent it receives a warning from the FDIC. If a bank falls under 2
percent, it becomes critically undercapitalized and is considered by the
FDIC to become insolvent.
What Accounts Are Insured by the
FDIC?
The FDIC insures several different types of banking
accounts:
" Checking Accounts
" NOW
Accounts (also known as Negotiable Order of Withdrawal accounts), or
interest bearing checking accounts
" Money Market Deposit Accounts
" Money Market Accounts, or high interest savings
accounts
" CDs (Certificates of Deposit) that require you to keep
money in the account until they are mature.
It is important to note the difference
between money market accounts, money market deposit accounts, and money
market funds. Money market accounts and money market deposit
accounts are both insured up to $100,000 by the FDIC. However, money
market funds offered by brokerage firms are not insured by the
FDIC.
It is deceiving, though, to think that the
insurance amount is only up to $100,000, as it is possible to get more
than $100,000 in coverage, as long as the money is placed in separate
ownership categories. For instance individual accounts, joint
accounts, and retirement accounts are all in different categories, so they
would each receive up to $100,000 in insurance. IRAs can even be
covered up to $250,000. Also, if the accounts are at different
banking institutions, they will each be covered up to $100,000.
What Is NOT Insured by the FDIC?
Even
though a banking institution is a member of the FDIC, it does not mean
every account is covered by FDIC insurance. These are some items
that are not covered:
" Stocks
" Bonds
" Mutual
Funds
" Money Market Funds
" Government-backed investments
like Treasury Securities
" Safe Deposit Box Contents (these can
often be covered by homeowners' insurance, but it is not considered a
deposit by the FDIC)
" Losses caused by theft or fraud at the
institution (there is special insurance for these
situations)
" Errors to your account (although they may be covered
by other federal and state laws like the Uniform Commercial
codes)
" Life, Auto, Homeowner's and other insurance or annuity
products
