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Federal Deposit Insurance Corporation (FDIC)

What happens to your money when a bank fails? The Federal Deposit Insurance Corporation, or FDIC, offers a safeguard in the form of deposit insurance. Here’s what you need to know about the Federal Deposit Insurance Corporation purpose, funding, and history.

What is the Federal Deposit Insurance Corporation?

Have you ever seen a reference to the FDIC and wondered what is the Federal Deposit Insurance Corporation exactly? In short, the FDIC is an independent agency set up to help protect the United States’ financial systems.

The major Federal Deposit Insurance Corporation purpose is overseeing insurance deposits for financial institutions, providing protection for US consumers. When you make a FDIC-insured deposit, you can leave your money in the bank safe in the knowledge that it’s protected by the government.

The FDIC was created in response to the widespread bank failures that happened during the Great Depression. After the 1929 stock market crash, panicked consumers withdrew their bank deposits all at once. Struggling banks began to fail after the double whammy of the stock market crash and the bank runs. To restore confidence in the US banking system, the 1933 Glass-Steagall Act created the FDIC.

What does the Federal Deposit Insurance Corporation do?

There’s a reason why most of us choose to deposit our money in secure bank accounts rather than in a shoebox under the bed – it’s perceived as safer. The FDIC carries much of the responsibility for this perception of safety by protecting investments.

So, what does the Federal Deposit Insurance Corporation do to protect deposits? A bank takes customer deposits, but it doesn’t just let it sit there. Instead, the bank puts your money to work, investing it to earn revenue. These investments can range from customer loans to stock market shares. In return, the bank will pay interest on financial products like certificates of deposit (CD) and savings accounts.

While banks make conservative investments, there’s inherent risk in any investment. This puts your deposit at risk, should the bank lose its money through faulty investments. When the bank has failed and doesn’t have your money if you go to make a withdrawal, the FDIC steps in to help.

Federal Deposit Insurance Corporation: insurance and limits

Federal Deposit Insurance Corporation benefits include safeguarding against total bank failure. If you’ve deposited money and the bank fails, you’ll receive what was in your account thanks to FDIC insurance. This is funded by the banks themselves, who pay premiums to the FDIC in order to protect customer deposits.

Generally, FDIC coverage goes up to $250,000 per bank account and account holder. This was increased from a $100,000 limit after the Dodd-Frank Wall Street Reform Act of 2010. Yet it’s not uncommon for retirement accounts or joint accounts to hold more than this amount. If you’re looking for places to store your savings, you might want to source additional insurance or spread your money across multiple institutions so that each account is insured.

You should also consider what’s covered under the Federal Deposit Insurance Corporation. Although it covers many types of financial products, not everything is insured.

What’s covered:

  • Checking accounts

  • Savings accounts

  • CDs and other time-sensitive deposits

  • Money orders and cashier’s checks

What’s not covered:

  • Credit union deposits (there are covered under the National Credit Union Share Insurance Fund)

  • Securities like stocks and bonds

  • Safe deposit box contents

  • Mutual funds and ETFs

  • Life insurance products

How to verify that your bank is covered by the FDIC

Finally, keep in mind that FDIC insurance only applies to member financial institutions, all of which will have a unique FDIC certificate number. If you don’t have this handy, the quickest way to verify your bank is to check the bank’s website for the FDIC logo. You can also visit the FDIC website and perform a bank search. Simply input the bank’s name and location to find out whether it’s insured.

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