What does it mean when your bank is a member of the FDIC?
Prior to 1929, there was no FDIC. When a bank closed its doors, there was no recourse for customers. Depositors were out of luck. Today, most U.S. banking customers know that the FDIC is a federal agency that insures the money you deposit in your bank. Still, there are many questions surrounding the FDIC, like what it does and does not insure, how much is ‘covered’ and how the insurance works when a bank fails.
In 1933, with the country still very much in the middle of the Great Depression, the FDIC was established. The government recognized that the role of banks in the communities they served was to invest in the local businesses and community development. So, to ease the fears of the public and to promote community growth, the FDIC was created. Its charter guaranteed that a depositor would not lose their money if their bank failed. Since that time, 78 years ago, no US depositor has lost a dime due to a bank failure. Since January 1, 1934, the FDIC has lived up to its charter. The FDIC is funded from premiums paid by its member banks, not from government funds.
Through the years, the amount of funds covered by the FDIC has changed, gradually increasing from the starting limit of $2,500 per investor to its present limit of $250,000. But this amount can be deceiving and is commonly misunderstood by depositors. The insurance limit does not represent the total deposits of an individual or family, but the total per depositor, per account type, within an individual bank. For example, if you are a single person with one checking account at your local bank and the balance in that checking account is $500,000, then you are over the covered limit and $250,000 is unprotected in the instance of bank failure. However, a joint account owned by two depositors would be covered for up to $500,000. ($250,000 for each individual depositor). If you are unsure about whether your accounts would be completely covered by FDIC should your bank fail, the FDIC has a great on-line tool for calculating your exposure.
Deposit accounts such as checking, savings, money markets and CDs are covered by the FDIC, as are revocable and irrevocable trust accounts and IRAs. However, investment accounts such as mutual funds, stocks, bonds or annuities are not covered. Because these investments by definition involve risk, they do not fall under FDIC protection. If in doubt about your specific accounts, contact your banker or check the FDIC website for additional details.
Unlike the unfortunate victims of failed Depression-era banks, as long as we select an FDIC-insured bank for our deposit needs and are aware of the specific limits regarding FDIC coverage, our deposit accounts are safe. Even if a bank does fail, the FDIC steps in immediately on behalf of all depositors. If a solvent bank is available to take on the deposits of the failed bank, they are transferred and the depositors are informed of the change. If no healthy bank is available to take over the accounts, the FDIC pays the depositors directly, by check, as soon as possible for all covered accounts. Their goal is to do so within two business days of failure. However, their mandate is “as soon as possible” for any specific failure. The FDIC website also contains information about recently failed banks and provides a “bank finder” that will locate FDIC-insured institutions based on selected criteria.
The current economic crisis has taught us that it is best to be well-informed about all financial decisions. Choose an FDIC member bank and if in doubt about any of the details, ask your banker or contact the FDIC directly.