The Great Depression of 1929 resulted in a flurry of new laws seeking to reinforce the banking system of the United States and avoid future runs on the banks in which people, in a panic, withdrew all their monies fearful of a bank collapse-and by their withdrawals caused the very collapse they feared. The government passed laws which, among other things, guaranteed certain types of deposits in the banks using the “full faith and credit” of the United States of America. Should the bank fail and be unable to pay, the government would pay, up to specified limits and only as to certain types of banks and accounts.
The basic criteria to impose the protections of the Federal Deposit Insurance Company (“FDIC”) is described in this article.


The Basics:

The United States Federal government passed the Federal Deposit Insurance Corporation (FDIC) in 1933 to protect consumers who hold their money in banks from bank failures. Depositors—persons who hold money in savings accounts, checking accounts, certificates of deposit, money market accounts, Individual Retirement Accounts (IRAs), or Keogh accounts—have FDIC protection of up to $100,000 in the event of a bank failure. Note that many banks and other institutions offer types of investment vehicles which are not subsumed within these categories and those do not receive these protections. Thus, if one invests in second deeds of trusts or mutual funds, even if offered by a bank, there is no protection.

The institutions are required to notify potential investors if there is such protection offered and (often in relatively small print) one will often see warnings in various investments that no such protection is offered.

Note also that the cap of one hundred thousand applies regardless of the total amount deposited, accrued interests and rights, etc. While it may be possible to increase the protection by holding up to the maximum in various institutions, in reality this gives added protection in any event since both or all the banks holding the money would have to fail to require this payment.

It is also possible, via use of Trusts or limited liability entities, to increase the protection afforded since each “depositor” is actually a different person under the law, assuming the entity is fully functional and appropriately created. The creation of such structures, however, can result in additional costs and income taxes being accrued. Good accounting and legal advice should be sought to undertake an appropriate cost benefit analysis of use of such entities. However, if their use is already mandated by other considerations, this can be an added benefit.

Note that the FDIC regulates all banks that are members of the Federal Reserve System and certain banks that are not members of the Federal Reserve System. It is the FDIC’s mission to monitor and regulate the banking industry, making certain that banks operate safely and legally, and to prevent bank failures while encouraging healthy competition within the industry. When a bank does fail by not having sufficient assets, the FDIC uses its money to reimburse the bank’s depositors. It then sells the failed bank’s assets and uses the profits to assist when other banks fail.

The FDIC employs approximately 8,000 people throughout the country. The headquarters are in Washington, D.C., but regional offices exist in Atlanta, Boston, Chicago, Dallas, Kansas City, Memphis, New York City, and San Francisco. In addition, field examiners, whose job is to conduct on-site inspections of banks, have field offices in 80 more locations throughout the country.

The FDIC has jurisdiction over banks in the 50 states, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands. It regulates banks, enforcing rules such as the Equal Credit Opportunity Act that prohibits certain forms of discrimination in lending, and inspects banks to be sure they are operating profitably and legally. Banks that are insured by the FDIC pay an assessment four times per year to the FDIC. The amount of assessment paid by the bank depends in part on the amount of funds deposited with the bank.


Brave New World?

The events of 2008 resulted in the realization that the various regulations that were supposed to control banks and protect their depositors were being undermined by various new types of investment vehicles and risk taking on the part of banks that imperiled their solvency. The collapse or near collapse of many hundreds of banks and the fragile nature of even the major banks may result in effective legislation, though how effective it will be in protecting consumers remains questionable. The banking industry has a powerful lobby and Wall Street is inventive in its ways to develop new and ever more complex vehicles which evade the restrictions imposed by the government.

Further, there was deep concern that the monies available to the FDIC were simply not enough to cover a truly major collapse of too many banks and that the FDIC, itself, would become insolvent. This concern remains present.

Nevertheless, the fact remains that the FDIC was able to protect each and every depositor (thus far) and the fact that at least this minimal amount was protected certainly had some calming effect on the public.

It is noteworthy that during the crisis there was much speculation that the one hundred thousand dollar limit might be increased to reflect the simple fact that inflation has made that minimal amount too minimal to protect much of the middle class. Given budget deficits and the desire of banks to avoid having to pay the increased cost that such insurance might require, it is by no means clear that the limit will be increased.

Many experts argue that in any major collapse the FDIC would not only have difficulty covering all the banks, but the government would possibly have to cover the collapses by simply issuing inflated currency of less value than the original deposit.

In short, there is protection there, indeed important protection, but by no means complete protection and the wise investor will carefully consider alternative means of protection of investments and savings.