Federal Deposit Insurance Corporation

To qualify for deposit insurance, member banks must follow certain liquidity and reserve requirements. Banks are classified in five groups according to their risk-based capital ratio:

• Well capitalized: 10% or higher
• Adequately capitalized: 8% or higher
• Undercapitalized: less than 8%
• Significantly undercapitalized: less than 6%
• Critically undercapitalized: less than 2%

When a bank becomes undercapitalized, the institution's primary regulator issues a warning to the bank. When the number drops below 6%, the primary regulator can change management and force the bank to take other corrective action. When the bank becomes critically undercapitalized the chartering authority closes the institution and appoints the FDIC as receiver of the bank.

The FDIC insures deposits at member banks in the event that a bank fails—that is, the bank's regulating authority decides that it no longer meets the requirements for remaining in business.

 

FDIC deposit insurance covers deposit accounts, which, by the FDIC definition, include:

• checking accounts and negotiable order of withdrawal (NOW) accounts (interest-bearing checking accounts with a hold option)
• savings accounts and money market deposit accounts (MMDAs, i.e., higher-interest savings accounts subject to check-writing restrictions)
• time deposits including certificates of deposit (CDs)
• outstanding cashier's checks, interest checks, and other negotiable instruments drawn on the accounts of the bank
• accounts denominated in foreign currencies^[17]

Accounts at different banks are insured separately. All branches of a bank are considered to form a single bank. Also, an Internet bank that is part of a brick and mortar bank is not considered to be a separate bank, even if the name differs. Non-US citizens are also covered by FDIC insurance as long as their deposits are in a domestic office of an FDIC-insured bank.^[17]

The FDIC publishes a guide which sets forth the general characteristics of FDIC deposit insurance, and addresses common questions asked by bank customers about deposit insurance.^[18][19]

Only the above types of accounts are insured. Some types of uninsured products, even if purchased through a covered financial institution, are:^[20]

• Stocks, bonds, and mutual funds including money funds
  • The Securities Investor Protection Corporation, a separate institution chartered by Congress, provides protection against the loss of many types of such securities in the event of a brokerage failure, but not against a decrease in their values.
  • Exceptions have occurred, such as the FDIC bailout of bondholders of Continental Illinois.
• Investments backed by the U.S. government, such as Treasury securities
• The contents of safe deposit boxes.

  Even though the word deposit appears in the name, under federal law a safe deposit box is not a deposit account – it is merely a secured storage space rented by an institution to a customer.

• Insurance and annuity products, such as life, auto and homeowner's insurance.

Deposit accounts are insured only against the failure of a member bank. Deposit losses that occur in the course of the bank's business, such as theft, fraud or accounting errors, must be addressed through the bank or state or federal law.

Deposit insurance also does not cover the failure of non-bank entities that use a bank to offer financial services, e.g. fintech financial technology companies. If the company places the money in an FDIC-insured bank account consumers are protected only under some conditions.^[12][13]

Each ownership category of a depositor's money is insured separately up to the insurance limit, and separately at each bank. Thus a depositor with $250,000 in each of three ownership categories at each of two banks would have six different insurance limits of $250,000, for total insurance coverage of $1,500,000.^[21] The distinct ownership categories are:^[21]

• Single accounts (accounts not falling into any other category)
• Certain retirement accounts (including Individual Retirement Accounts (IRAs))
• Joint accounts (accounts with more than one owner with equal rights to withdraw)
• Revocable and irrevocable trust accounts (containing the words "Payable on death", "In trust for", etc.)
• Employee Benefit Plan accounts (deposits of a pension plan)
• Corporation/partnership/unincorporated association accounts
• Government accounts

All amounts that a particular depositor has in accounts in any particular ownership category at a particular bank are added together and are insured up to $250,000.

For joint accounts, each co-owner is assumed (unless the account specifically states otherwise) to own the same fraction of the account as does each other co-owner (even though each co-owner may be eligible to withdraw all funds from the account). Thus if three people jointly own a $750,000 account, the entire account balance is insured because each depositor's $250,000 share of the account is insured.

The owner of a revocable trust account is generally insured up to $250,000 for each unique beneficiary (subject to special rules if there are more than five of them). Thus if there is a single owner of an account that is specified as in trust for (payable on death to, etc.) three different beneficiaries, the funds in the account are insured up to $750,000.

On January 21, 2022, the Board of Directors passed a Final Rule to simplify the Ownership Categories by combining Revocable and Irrevocable Trusts into a single ownership category. The policy came into effect on April 4, 2022.^[22]

On April 1, 2024, the Board of Directors changed how accounts held under the same name would be insured.^[23]

The FDIC receives no funding from the federal budget. Instead it assesses premiums on each member and accumulates them in a Deposit Insurance Fund (DIF) that it uses to pay its operating costs and the depositors of failed banks. The amount of each bank's premiums is based on its balance of insured deposits and the degree of risk that it poses to the FDIC. The DIF is fully invested in Treasury securities and therefore earns interest that supplements the premiums. Under the Dodd–Frank Act of 2010, the FDIC is required to fund the DIF to at least 1.35% of all insured deposits; in 2020, the amount of insured deposits was approximately $8.9 trillion and therefore the fund requirement was $120 billion.^[24] During two banking crises—the savings and loan crisis and the 2007–2008 financial crisis—the FDIC has expended its entire insurance fund. On these occasions it has met insurance obligations directly from operating cash, or by borrowing through the Federal Financing Bank.^[25][26] Another option, which it has never used, is a direct line of credit with the Treasury on which it can borrow up to $100 billion.

Between 1989 and 2006, there were two separate FDIC reserve funds: the Bank Insurance Fund (BIF), and the Savings Association Insurance Fund (SAIF). This division reflected the FDIC's assumption of responsibility for insuring savings and loan associations after another federal insurer, the FSLIC, was unable to recover from the savings and loan crisis. The existence of two separate funds for the same purpose led banks to shift business from one to the other, depending on the benefits each could provide. In the 1990s, SAIF premiums were, at one point, five times higher than BIF premiums; several banks attempted to qualify for the BIF, with some merging with institutions qualified for the BIF to avoid the higher premiums of the SAIF. This drove up the BIF premiums as well, resulting in a situation where both funds were charging higher premiums than necessary.^[27]

Then-Chair of the Federal Reserve Alan Greenspan was a critic of the system, saying, "We are, in effect, attempting to use government to enforce two different prices for the same item – namely, government-mandated deposit insurance. Such price differences only create efforts by market participants to arbitrage the difference." Greenspan proposed "to end this game and merge SAIF and BIF".^[28] In February 2006, President George W. Bush signed into law the Federal Deposit Insurance Reform Act of 2005 (FDIRA). Among other purposes, the act merged the BIF and SAIF into a single fund.

As of December 31, 2022, the balance of FDIC's Deposit Insurance Fund is $128.2 billion.^[29] The year-end balance has increased every year since 2009.^[29]

 

Upon a determination that a bank is insolvent, its chartering authority—either a state banking department or the U.S. Office of the Comptroller of the Currency—closes it and appoints the FDIC as receiver. In its role as a receiver the FDIC is tasked with protecting the depositors and maximizing the recoveries for the creditors of the failed institution. The FDIC as receiver is functionally and legally separate from the FDIC acting in its corporate role as deposit insurer. Courts have long recognized these dual and separate capacities as having distinct rights, duties and obligations.

The goals of receivership are to market the assets of a failed institution, liquidate them, and distribute the proceeds to the institution's creditors. The FDIC as receiver succeeds to the rights, powers, and privileges of the institution and its stockholders, officers, and directors. It may collect all obligations and money due to the institution, preserve or liquidate its assets and property, and perform any other function of the institution consistent with its appointment. It also has the power to merge a failed institution with another insured depository institution and to transfer its assets and liabilities without the consent or approval of any other agency, court, or party with contractual rights. It may form a new institution, such as a bridge bank, to take over the assets and liabilities of the failed institution, or it may sell or pledge the assets of the failed institution to the FDIC in its corporate capacity.

The two most common ways for the FDIC to resolve a closed institution and fulfill its role as a receiver are:

• Purchase and assumption agreement (P&A), in which deposits (liabilities) are assumed by an open bank, which also purchases some or all of the failed bank's loans (assets). The bank's assets^[30] that convey to the FDIC as receiver are sold and auctioned through various methods, including online, and using contractors.
• Deposit payoff: As soon as the appropriate chartering authority closes the bank or thrift, the FDIC is appointed receiver. The FDIC as insurer pays all of the failed institution's depositors^[31] with insured funds the full amount of their insured deposits. Depositors with uninsured funds and other general creditors (such as suppliers and service providers) of the failed institution do not receive either immediate or full reimbursement; instead, the FDIC as receiver issues them receivership certificates. A receivership certificate entitles its holder to a portion of the receiver's collections on the failed institution's assets.

Originally the only resolution method was to establish a temporary deposit insurance national bank that assumed the failed bank's deposits on behalf of the FDIC.^[32] This method fell into disuse after the law was revised in 1935 to allow the other options above, although it has been used occasionally when the FDIC determines that it is the most practical way to continue banking service to the failed bank's community.^[33]

In 1991, to comply with legislation, the FDIC amended its failure resolution procedures to decrease the costs to the deposit insurance funds. The procedures require the FDIC to choose the resolution alternative that is least costly to the deposit insurance fund of all possible methods for resolving the failed institution. Bids are submitted to the FDIC where they are reviewed and the least cost determination is made.

To assist the FDIC in resolving an insolvent bank, covered institutions are required to submit a resolution plan which can be activated if necessary. In addition to the Bank Holding Company ("BHC") resolution plans required under the Dodd Frank Act under Section 165(d),^[34] the FDIC requires a separate Covered Insured Depository Institution ("CIDI") resolution plan for US insured depositories with assets of $50 billion or more. Most of the largest, most complex BHCs are subject to both rules, requiring them to file a 165(d) resolution plan for the BHC that includes the BHC's core businesses and its most significant subsidiaries (i.e., "material entities"), as well as one or more CIDI plans depending on the number of US bank subsidiaries of the BHC that meet the $50 billion asset threshold.^[35]

On December 17, 2014, the FDIC issued guidance for the 2015 resolution plans of CIDIs of large bank holding companies (BHCs).^[36] The guidance provides clarity on the assumptions that are to be made in the CIDI resolution plans and what must be addressed and analyzed in the 2015 CIDI resolution plans including:^[35]

• The assumption that the CIDI must fail.
• The cause of CIDI failure must be a core business loss or impairment.
• At least one "multiple acquirer strategy" is required in the plan.
• A deep level of granularity is expected in the plan.
• Sales strategies must be feasible and supported by considerable acquirer detail.
• A detailed financial and liquidity analysis is needed.
• Key legal issues must be considered.
• Resolution obstacles must be addressed.
• The CIDI must be insolvent at the start of resolution.

The board of directors is the governing body of the FDIC. The board is composed of five members, three appointed by the president of the United States with the consent of the United States Senate and two ex officio members. The three appointed members each serve six-year terms. These may continue to serve after the expiration of their terms of office until a successor has taken office. No more than three members of the board may be of the same political affiliation.

The president, with the consent of the Senate, also designates one of the appointed members as chairman of the board, to serve a five-year term and one of the appointed members as vice chairman of the board. The two ex officio members are the Comptroller of the Currency and the director of the Consumer Financial Protection Bureau (CFPB).

The current board members as of September 25, 2024:^[37]

President Biden has nominated the following to fill seats on the board. They await Senate confirmation.^[38]

Without deposit insurance, bank depositors took the risk that their bank could run out of cash due to losses on its loans or an unexpected surge in withdrawals, leaving them with few options to recover their money.^[39] The failure of one bank might shift losses and withdrawal demands to others and spread into a panic. During the Panics of 1893 and 1907, many banks^{[note 1]} filed bankruptcy due to bank runs. Both of the panics renewed discussion on deposit insurance. In 1893, William Jennings Bryan presented a bill to Congress proposing a national deposit insurance fund. No action was taken, as the legislature paid more attention to the agricultural depression at the time.^[40]

After 1907, eight states established deposit insurance funds.^[41] Due to the lax regulation of banks and the widespread inability of banks to branch, small, local unit banks—often with poor financial health—grew in numbers, especially in the western and southern states.^[42] In 1921, there were about 31,000 banks in the US.^[43] The Federal Reserve Act initially included a provision for nationwide deposit insurance, but it was removed from the bill by the House of Representatives. From 1893 to the FDIC's creation in 1933, 150 bills were submitted in Congress proposing deposit insurance.^[44]

The problem of bank instability was already apparent before the onset of the Great Depression. From 1921 to 1929, approximately 5,700 bank failures occurred, concentrated in rural areas. Nearly 10,000 failures occurred from 1929 to 1933, or more than one-third of all U.S. banks.^[39][8] A panic in February 1933 spread so rapidly that most state governments ordered the closure of all banks.^[45]

 

President Franklin D. Roosevelt himself was dubious about insuring bank deposits, saying, "We do not wish to make the United States Government liable for the mistakes and errors of individual banks, and put a premium on unsound banking in the future." Bankers likewise opposed insurance, arguing that it would create a moral hazard for bankers and depositors, and even denounced it as socialist. Yet public support was overwhelmingly in favor.^[46] On June 16, 1933, Roosevelt signed the 1933 Banking Act into law, creating the FDIC. The initial plan set by Congress in 1934 was to insure deposits up to $2,500 ($56,940 today)^[47] and adoption of a more generous, long-term plan after six months.^{[note 2]} However, the latter plan was abandoned for an increase of the insurance limit to $5,000 (equivalent to $113,881 in 2023).^[47][48]

The 1933 Banking Act:

• Established the FDIC as a temporary government corporation.
• Gave the FDIC authority to provide deposit insurance to banks
• Gave the FDIC the authority to regulate and supervise state non-member banks
• Funded the FDIC with loans in the form of stock contributions from the Treasury and the Federal Reserve Banks
• Extended federal oversight to all commercial banks for the first time
• Separated commercial and investment banking (Glass–Steagall Act)
• Prohibited banks from paying interest on checking accounts
• Allowed national banks to branch statewide, if allowed by state law.

The Banking Act of 1935 made the FDIC a permanent agency of the government and provided permanent deposit insurance maintained at the $5,000 level.

 

The per-depositor insurance limit has increased over time to accommodate inflation.

• 1934: $2,500
• 1935: $5,000
• 1950: $10,000
• 1966: $15,000
• 1969: $20,000
• 1974: $40,000
• 1980: $100,000
• 2008: $250,000

Congress approved a temporary increase in the deposit insurance limit from $100,000 to $250,000, which was effective from October 3, 2008, through December 31, 2010. On May 20, 2009, the temporary increase was extended through December 31, 2013. The Dodd–Frank Wall Street Reform and Consumer Protection Act (P.L.111-203), which was signed into law on July 21, 2010, made the $250,000 insurance limit permanent,^[49] and extended the guarantee retroactively to January 1, 2008, meaning it covered uninsured deposits banks like IndyMac. In addition, the Federal Deposit Insurance Reform Act of 2005 (P.L.109-171) allows for the boards of the FDIC and the National Credit Union Administration (NCUA) to consider inflation and other factors every five years beginning in 2010 and, if warranted, to adjust the amounts under a specified formula.^[50][51]

FDIC-insured institutions are permitted to display a sign stating the terms of its insurance—that is, the per-depositor limit and the guarantee of the United States government. The FDIC describes this sign as a symbol of confidence for depositors.^[52] As part of a 1987 legislative enactment, Congress passed a measure stating "it is the sense of the Congress that it should reaffirm that deposits up to the statutorily prescribed amount in federally insured depository institutions are backed by the full faith and credit of the United States",^[53] and similar language is used in 12 U.S.C. § 1825(d), a 1989 amendment to the Federal Deposit Insurance Act.

Federal deposit insurance received its first large-scale test since the Great Depression in the late 1980s and early 1990s during the savings and loan crisis (which also affected commercial banks and savings banks).

The Federal Savings and Loan Insurance Corporation (FSLIC) had been created to insure deposits held by savings and loan institutions ("S&Ls", or "thrifts"). Because of a confluence of events, much of the S&L industry was insolvent, and many large banks were in trouble as well. FSLIC's reserves were insufficient to pay off the depositors of all of the failing thrifts, and fell into insolvency. FSLIC was abolished in August 1989 and replaced by the Resolution Trust Corporation (RTC). On December 31, 1995, the RTC was merged into the FDIC, and the FDIC became responsible for resolving failed thrifts. Supervision of thrifts became the responsibility of a new agency, the Office of Thrift Supervision (credit unions remained insured by the National Credit Union Administration). The primary legislative responses to the crisis were the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), and the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). Federally chartered thrifts are now regulated by the Office of the Comptroller of the Currency (OCC), and state-chartered thrifts by the FDIC.

The final combined total for all direct and indirect losses of FSLIC and RTC resolutions was an estimated $152.9 billion. Of this total amount, U.S. taxpayer losses amounted to approximately $123.8 billion (81% of the total costs).^[54]

When the FDIC's Bank Insurance Fund was exhausted in 1990, it received authority from Congress to borrow through the Federal Financing Bank (FFB).^[55] Using this facility, the FDIC borrowed $15 billion to strengthen the fund, and repaid the debt by 1993.^[56]

The FDIC faced its greatest challenge from the 2007–2008 financial crisis. From 2008 to 2017 a total of 528 member institutions failed, with the annual number peaking at 157 in 2010.^[57] These included the largest failure to date, Washington Mutual,^[58][59] and the sixth largest, IndyMac. Wachovia, another large bank, avoided failure through last-minute merger arrangements at the FDIC's insistence. At the height of the crisis in late 2008, Treasury secretary Henry Paulson and Federal Reserve officials Ben Bernanke and Timothy Geithner proposed that the FDIC should guarantee debts across the US financial sector, including investment banks. Chairman Sheila Bair resisted, and after negotiations the FDIC instead announced a Temporary Liquidity Guarantee Program that guaranteed deposits and unsecured debt instruments used for day-to-day payments. To promote depositor confidence, Congress temporarily raised the insurance limit to $250,000.^[60]

Although most failures were resolved through merger or acquisition, the FDIC's insurance fund was exhausted by late 2009. The largest FDIC payout for that year was for the failure of Florida-based BankUnited FSB, which cost the fund $5.6 billion out of $17 billion at the start of the year.^[61] Rather than borrowing from the FFB or the Treasury, the FDIC demanded three years of advance premiums from its member institutions and operated the fund with a negative net balance.

The Dodd–Frank Act of 2010 created new authorities for the FDIC to address risks associated with systemically important financial institutions. These institutions were required to submit resolution plans, or "living wills," which the FDIC would execute in the event of their failure. A new division, the Office of Complex Financial Institutions, was created to administer these responsibilities.^[62][63][64] The act also made the insurance limit increase permanent and required the FDIC to submit a restoration plan whenever the insurance fund balance falls below 1.35% of insured deposits. The insurance fund returned to a positive balance at the start of 2011 and reached its required balance in 2018. That year also saw no bank failures for the first time since the crisis.^[57]

• CAMELS rating system – developed by the FDIC's Division of Risk Management Supervision (RMS) to rate each U.S. bank and credit union
• Canada Deposit Insurance Corporation – Canadian counterpart to FDIC
• Depositors Insurance Fund—The inspiration for the formation of the FDIC
• National Credit Union Share Insurance Fund – NCUA counterpart to FDIC
• Financial Services Compensation Scheme - the United Kingdom's equivalent to FDIC

• Bovenzi, John (2015). Inside the FDIC: Thirty Years of Bank Failures, Bailouts, and Regulatory Battles. New York: John Wiley & Sons. ISBN 978-1-118-99408-5.
• Golembe, Carter, H. (1960). "The Deposit Insurance Legislation of 1933: An Examination of Its Antecedents and Its Purposes". Political Science Quarterly. 75 (2): 181–200. doi:10.2307/2146154. JSTOR 2146154.{{cite journal}}: CS1 maint: multiple names: authors list (link)
• Shaw, Christopher (2015). "'The Man in the Street Is for It': The Road to the FDIC". Journal of Policy History. 27 (1): 36–60. doi:10.1017/S0898030614000359. S2CID 154303860.
• Walter, John (2005). "Depression-Era Bank Failures: The Great Contagion or the Great Shakeout?". Economic Quarterly. 91 (1). SSRN 2185582.  
• White, Eugene, N. (1981). "State-Sponsored Insurance of Bank Deposits in the United States, 1907–1929". The Journal of Economic History. 41 (3): 537–557. doi:10.1017/S0022050700044326. S2CID 153997829.{{cite journal}}: CS1 maint: multiple names: authors list (link)

• "Your Bank Has Failed: What Happens Next?"—60 Minutes
• Kaufman, George G. (2002). "Deposit Insurance". In David R. Henderson (ed.). Concise Encyclopedia of Economics (1st ed.). Library of Economics and Liberty. OCLC 317650570.
• History including Boards of Directors
• "Federal Deposit Insurance for Banks and Credit Unions"—Congressional Research Service

 

Wikimedia Commons has media related to Federal Deposit Insurance Corporation.

• Official website
• Federal Deposit Insurance Corporation in the Federal Register
• 12 CFR Chapter III of the Code of Federal Regulations from the LII
• 12 CFR Chapter III of the Code of Federal Regulations from the OFR
• Federal Deposit Insurance Corporation on USAspending.gov
• FDIC Statistics at a Glance
• FDIC List of Failed Banks