In 1929, the United States of America began a 10+ year stretch that would forever change the nation. October 29th of that year, known as black Tuesday, is the day that most historians cite as the start of the Great Depression. The Great Depression was the most difficult economic time our nation had ever seen and with an unemployment rate of 25%, a lot of changes were needed. Hundreds of the laws and acts implemented by Congress to improve living during difficult times are still utilized today and one of the most well-known of those changes, is the establishment of the FDIC.
The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation put into motion by the Glass-Steagall Act of 1933. During the Great Depression, banks found it difficult to cover customer withdrawals, and when a bank didn’t have the funds, that was that. Consumers were not depositing their money in banks any longer because they feared it would be lost, so the government guaranteed deposits, up to $2,500 per depositor. Today, the FDIC guarantees the safety of deposits made up to $250,000 per depositor, per bank. This means that if I have $1 million tucked away in Discover Bank and somewhere down the line Discover Bank fails, $750,000 of my money is potentially lost forever. When most banks fail, their deposits are assumed by another bank. While it’s rare for a customer to lose even a partial amount of his or her money, the smarter play would be to divide your assets up amongst multiple banks to reduce the risk that all your money would be held by a failed bank.
The $250,000 amount of insurance you see today has changed substantially since the inception of the FDIC. On January 1st, 2014, the amount of insurance provided by the FDIC will drop for the very first time, back to the $100,000 mark. A history of FDIC insurance rates on member bank deposits can be found in the table below.
|Year Implemented||FDIC Insurance Amount|
The governing body of the FDIC is made up of five board members, three of whom are chosen directly by the President of the United States. No more than three board members can be affiliated with the same political party so that changes made to policy are not one-sided. Each of the appointed board members serve six year terms, and the President, with Consent from the Senate, designates one of the appointed members as Chair of the Board and another as Vice Chair of the Board (Both of which are five year terms). The current FDIC Board of Directors is made up of the following individuals:
- Shelia C Blair – Chair of the Board
- Martin J Gruenberg – Vice Chair of the Board
- Thomas J Curry
- John C Dugan
- John E Bowman
Banks that wish to receive FDIC insurance need to meet certain criteria in order to be covered. The most significant criteria is a bank’s capitalization. If they fall below a certain threshold, they can lose their FDIC insurance. There are five classifications for capitalization:
- Well Capitalized (10% or higher)
- Adequately Capitalized (8% or higher)
- Under-Capitalized (less than 8%)
- Significantly Under-Capitalized (less than 6%)
- Critically Under-Capitalized (less than 2%)
If a bank falls below the 8% mark when the FDIC reviews its assets, the bank will be given a very stern warning. Should the bank be significantly under-capitalized, the FDIC has the authority to step in and change management as it sees fit. In the dire case of a bank becoming critically under-capitalized, the FDIC will most likely shut the bank down and/or take the bank over.
It’s important to understand what accounts are insured by the FDIC because not all accounts are covered. If you’ve opened a high interest savings account with your bank, for example, breathe easy because the FDIC will cover the total of your accounts, up to $250,000. Any kind of investing account you have, such as a mutual fund or annuity, is not covered.