Federal Deposit Insurance Corporation (FDIC) - What is Federal Deposit Insurance?

Many of you might have noticed that there is a sticker or sign prominently displayed somewhere in your bank that states “Member FDIC”. Do you know who the FDIC is and what it protects?

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The FDIC stands for Federal Deposit Insurance Corporation and is an independent agency of the United States government. Its function is to protect the funds that depositors place into banks and savings associations. It is backed by the US government and has been around since 1933. Since the establishment of the FDIC, no depositor has ever lost any money in a US bank.

What Does it Protect?

The FDIC protects various accounts in your bank, but not all. For example, if you have a checking account, it will be protected. If you have a savings account, that will be protected too, while Money Market Deposit accounts and Certificates of Deposit are also protected. However, the FDIC does not protect other financial products that your bank may offer, such as stocks, bonds, mutual funds, life insurance policies, annuities, or other securities. This insurance is meant only for the most basic of investment and savings vehicles.

The greatest aspect to this insurance is that you don’t have to apply for it. By simply having one of the deposits covered, you are already enrolled into the insurance program. By being served by an FDIC covered bank, you are automatically using the insurance. It should be noted that credit unions are not covered by the FDIC, but they have their own version of it called the National Credit Union Share Insurance Fund. This was created by Congress in 1970 to serve the same function. If you are in a credit union, simply look for the NCUA sticker (National Credit Union Association).

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How Much Does It Protect?

The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. As an example, let’s say you have $50,000 in Bank A, in a checking account. Across the street, you have $27,000 in Bank B, in a savings account. You would be completely covered on both of these accounts by the FDIC’s insurance. However, things could get a little bit more complicated if you are a wealthier individual, because you are much more likely to have account balances that could stretch the limits of insurance.

Let’s take an alternate scenario. You have $275,000 in a checking account, $26,000 in a savings account, and a $5,000 certificate of deposit in a bank. If the bank becomes insolvent, you would be covered for $250,000 in your checking account, leaving a loss of $25,000. However, the entire $26,000 in savings and $5,000 in the certificate of deposit would both be covered. It is because of this that wealthier clients typically will use other insurance vehicles to protect deposits, or simply break up their deposits with separate banks. In this example, the depositor would have been better served to deposit $250,000 in their checking account at Bank A, and a $25,000 deposit into a separate checking account at Bank B.

My Bank Has Failed. What Happens Now?

If you are under the $250,000 level in these applicable accounts, rest assured your money is safe. However, it doesn’t happen immediately. Typically, the insurance gets paid to depositors within a few days after a bank closing. In fact, quite often it happens the very next business day by either providing each depositor with a new account at another insured bank in the equal amount, or by issuing a check to each depositor for the insured balance of their account at the failed bank.

Some deposits that exceed $250,000 and are linked to trust documents or deposits established by a third-party broker, may have a short wait so that their accounts can be reviewed to determine the amount of deposit insurance coverage available to them. The amount of time will depend on how long it takes for the depositor to provide supplemental information to the insurer so that they can complete the insurance determination.

If you do find yourself in a scenario where you have more than the insured funds, the FDIC will typically be given the task of selling or collecting the assets of the failed bank in settling its debts, including your claim. You may see some of your deposit returned after assets are sold or the settlement of the liquidation. At this point though, you should never find yourself in this situation as you should simply stay under the limit at various banks or use different vehicles, such as checking accounts, savings accounts, and a certificate of deposit to make sure that you fall underneath the required limit.

I Have a Few Other Deposits that I’m Not Sure About

If you find yourself in a situation where you aren’t entirely sure about your deposit being protected through insurance, there is a simple way to find out. You can go to the FDIC’s Electronic Deposit Insurance Estimator on their website and enter information about each of your accounts. Otherwise, you can call the FDIC itself to ask these questions. Remember that it is better to be safe than sorry!