What is the F.D.I.C.?

When you stand at the bank you’ve probably seen a plaque with the letters “FDIC” and the tagline:

“Backed by the full faith and credit of the United States Government.”

But what does that mean and what does this “FDIC” stand for?

What is the F.D.I.C.?

The F.D.I.C. is the Federal Deposit Insurance Corporation. The FDIC was started after the Great Depression in order to “promote public confidence in the United States Financial System.” You see, when the depression hit, dozens of banks went out of business and people’s entire life savings simply disappeared.

It is the FDIC’s job to guarantee the deposits of all American Citizens in any FDIC member bank up to a predetermined limit. Due to the recession every individual account is insured up to $250,000.00 until December 31, 2013, after which it will return to its previous $100,000.00 level.

Why aren’t all banks FDIC Members?

Why wouldn’t a bank want to be an FDIC member? Well, most do. Almost every bank that you come in contact with will be FDIC insured. The problem many find with it though is that the bank gives up much control over risk taking. The FDIC breaks each bank into a category of “riskiness” based on how much capital (cash) they maintain (instead of lending out):

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

If a bank ever falls into the final category, they will be issued a warning by the FDIC. If the warning goes unheeded the FDIC can take over management from the bank.

What happens when a bank goes under?

The FDIC has two methods for dealing with failed banks and making right with the insured customers.

1. The Purchase and Assumption Model
   This is a fancy way of saying that they sell the bank’s assets (including your deposits) to another bank, who then takes over responsibility.  This is the preferred method.  The sale and acquisition is practically unnoticeable for the average customer and the customer can continue banking with their new bank just as they did before.
2. The Payout Method
   This is a less fancy way of saying that the FDIC sells all of the bank’s holdings and uses the proceeds (plus Government Money if necessary) to pay back the bank’s depositors.

What types of Accounts do the FDIC insure?

To be sure which accounts of yours are insured, check the FDIC website.
In general though, the FDIC covers “Deposit Accounts” which include:

• Checking Accounts (What is a checking account?)
• Savings Accounts (What is a Savings Account?)
• Time Deposit Accounts (CD’s) (What is a CD?)
• Foreign Currency Accounts
• Outstanding Cashiers checks, etc.