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What is the FDIC?

The last time you visited your bank or used an ATM, you might have seen a sign that says your deposits are insured by the Federal Deposit Insurance Corporation. This insurance is a big part of why people feel safe depositing their money a bank. Even through the Great Recession, consumers had some piece of mind because they knew their money would still be there if the economy struggled. So what exactly is the FDIC and how does it insure your money?

What Is the FDIC?

The Federal Deposit Insurance Corporation is an independent agency of the federal government. It insures the deposits that a customer makes in FDIC-insured banks. It gives people the confidence that their money is safe even when the economy or a bank is not doing well.

The FDIC began as a temporary agency in 1933. After the stock market crash of 1929, the banking system was struggling. Between 1929 and 1933, thousands of banks closed and lost billions in consumer deposits. With the start of the Federal Deposit Insurance Corporation, the government gave customers confidence that even if times were tough, consumers would be paid back for the money they had deposited in banks.

The FDIC was a temporary agency to help the country through the Great Depression. It was such a success that the government decided to make it permanent. Today the FDIC insures about 4,000 banks, which is more than half of the financial institutions in the banking system.

Originally, the Federal Deposit Insurance Corporation got its funding from the U.S. Treasury. Then it changed to a system where member banks pay premiums in order to receive coverage. The premiums go into an insurance account and the fund from that account cover all the banks in case of failure.

FDIC Insurance Limit

First of all, the FDIC only insures certain institutions. Banks have to pay premiums and meet certain regulations in order to gain this coverage. Once a bank gets covered the FDIC will cover deposits up a limit of $250,000 per person, per institution and per ownership category. Examples of an ownership category are single and joint accounts.

So let’s say you have $150,000 in a savings account that you are the sole owner of. If your bank fails, the FDIC will cover up to $250,000 from your account. That means all of your money is covered. If you had $150,000 in a savings account and $150,000 in a checking account (for a total of $300,000) the FDIC would only cover the first $250,000. You would still lose $50,000 but the majority of your money would be safe.

For joint accounts, each co-owner receives $250,000 of coverage. That means if you and your spouse have a joint account, the account is covered up to $500,000. If you’re considering a joint account, here’s some advice on when a joint account does and doesn’t make sense.

What the FDIC Covers

As a rule, the FDIC covers all types of deposit accounts at FDIC-insured banks. This includes checking accounts, savings accounts, money market accounts and certificates of deposit. Most revocable and irrevocable trusts are covered.

It doesn’t matter if the above accounts have a single owner or joint owners. It also makes no difference if these accounts belong to a business or organization. In addition to the accounts already mentioned, the FDIC covers cashier’s checks, money orders and other official items that a bank issues.

If you want to see how much of your money would be covered should your bank fail, the FDIC has a tool on its website to help you calculate this.

What the FDIC Doesn’t Cover

What is the FDIC?

As a rule, the FDIC will not cover your money if it isn’t in a deposit account. The biggest exclusion is investments. This includes money that you invest in stocks, bonds, mutual funds and annuities. Even if you invest in and trade stocks through an FDIC-insured bank, you can not receive insurance coverage on your losses. Any money that you invest through an individual retirement account (IRA) like a traditional IRA of Roth IRA, also isn’t insured. However, the FDIC does cover any deposits that you have in your retirement accounts. If you had a CD in your Roth IRA, it would receive the same coverage as a CD outside of a retirement account.

Customer are not reimbursed for money lost through theft or natural disasters like floods and earthquakes. However, you may still receive reimbursement from your bank. Banks also pay for insurance, separately from the FDIC. This insurance is called a banker’s blanket bond and it covers things like robberies and accidental damage.

The FDIC also doesn’t cover U.S. Treasury bills, bonds, or notes. These are backed by the U.S. government.

What Happens to Your Money When a Bank Fails?

OK, so the Federal Deposit Insurance Corporation covers your money. That’s great, but what actually happens to your money if your bank fails? First of all, a bank fails because it becomes insolvent. That means it cannot pay its debts and obligations when they are due. If this happens to an FDIC-insured bank, the FDIC will usually look to sell the bank’s assets to another bank through a strategy called purchase and assumption. The FDIC will calculate the assets of the insolvent bank and sell those assets to another bank. Your accounts would simply transfer to the new bank, which would assume the responsibility of handling your money and accounts. The transfer during a purchase and assumption is usually very smooth for the customer.

If the FDIC cannot sell an insolvent bank’s assets, it will look to directly pay off the accounts. In that case you would receive a check from the FDIC for the balance of all your insured accounts. This normally happens within a few days of a bank’s closing. Once you have the check, you can transfer it to whichever institution or account you prefer. In the off chance that the FDIC requires more information or action from you in order to redeem your deposits, it will notify you by mail.

The Takeaway

What is the FDIC?

The Federal Deposit Insurance Corporation started during the Great Depression to provide confidence to bank customers who were afraid of losing their money. Today the FDIC continues to insure deposit accounts up to $250,000. This includes checking accounts, savings accounts, money market accounts and certificates of deposit. It also includes individual, joint and business accounts. It does not cover any investment losses, even if the investment account is at an FDIC-insured bank.

If you are looking for a new bank to deposit your money, you should always make sure that the bank is insured by the FDIC. This will give you the confidence to deposit money without fear of losing all your money should things go south.

Banking Tips

  • If you’re looking for a new bank, you should check to see that the bank is FDIC-insured. Of course, there are other things to consider too. What kind of accounts does the bank have? How much does it cost to open and maintain the type of accounts you need? Here is an article on things to look for when choosing a bank.
  • In recent years, online banks have been rising in popularity. They don’t have physical offices, but they are often cheaper and more convenient for customers. Online banks can be just as secure as a traditional bank. If an online bank sounds appealing to you, here’s an overview of online banks vs. traditional banks.
  • During the Great Recession, the Federal Deposit Insurance Corporation gave customers confidence that they wouldn’t lose all the money they had in the bank. However, another threat to your bank account is theft. Illegal access to bank accounts is one of the fastest-growing financial crimes today. Protect yourself by checking out these five ways to protect your bank accounts.

Photo credit: ©iStock.com/vm, ©iStock.com/SeanShot, ©iStock.com/Aslan Alphan

Derek Silva, CEPF® Derek Silva is determined to make personal finance accessible to everyone. He writes on a variety of personal finance topics for SmartAsset, serving as a retirement and credit card expert. Derek is a member of the Society of American Business Editors and Writers and a Certified Educator in Personal Finance® (CEPF®). He has a degree from the University of Massachusetts Amherst and has spent time as an English language teacher in the Portuguese autonomous region of the Azores. The message Derek hopes people take away from his writing is, “Don’t forget that money is just a tool to help you reach your goals and live the lifestyle you want.”
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