What Is The FDIC And How Does It Work? (2023)

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You see “Member FDIC” displayed in most banks and highlighted on banking products. You’ve been told to look out for the FDIC logo as a sign of security. And you know that if you don’t see the logo, your money may be at risk.

But what do you really know about the FDIC and the deposit protection it offers banking customers? To help you better understand your relationship with the FDIC, here’s a closer look at how this organization works.

What Is the FDIC?

The FDIC (Federal Deposit Insurance Corporation) is an independent government agency that oversees the banking industry. The FDIC’s primary duty is to insure deposits at U.S. member banks in case they fail.

In addition to providing deposit insurance, the FDIC supervises and examines banks and savings associations across the country to make sure they’re operating soundly. The FDIC serves as the primary federal regulatory agency for banks that are chartered by states but are not part of the Federal Reserve System.

It’s also the FDIC’s responsibility to make sure banks comply with consumer protection laws, including the Fair Credit Billing Act, the Truth in Lending Act and the Fair Debt Collection Practices Act. The FDIC is headquartered in Washington, D.C., and is managed by a board of directors that includes members of the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau.

How Does the FDIC Work?

The FDIC works by protecting consumer deposits at member banks. The FDIC does not protect deposits held at credit unions. Instead, credit unions are generally insured by the National Credit Union Administration (NCUA).

Protecting Your Investments

The FDIC insures deposit accounts at member banks. The types accounts that the FDIC covers include:

  • Checking accounts
  • Savings accounts
  • Money market deposit accounts
  • Certificate of deposit (CD) accounts
  • Cashier’s checks, money orders and other official items issued by a bank

You might be wondering whether the FDIC insures investments, such as stocks or bonds, and investment accounts. The answer is no; those accounts are not protected by FDIC coverage.

The FDIC does, however, extend deposit insurance to brokered CD accounts. A brokered CD is a CD issued by a bank and sold to consumers through a brokerage. Brokered CDs can offer higher rates of return than standard CDs, though they can also carry a greater degree of risk.

Insuring Against Bank Failure

A bank failure means that a bank is unable to meet its financial obligations to its depositors and creditors. Bank failures in the U.S. are rare; there were none reported in 2021 and just four reported in 2020.

When a member FDIC bank fails, the FDIC steps in to protect deposits. The agency first attempts to complete the acquisition of the failed bank by another financial institution. Depositors don’t lose access to their funds, and their accounts are simply moved to the acquiring bank.

If the FDIC can’t find a financial institution to acquire the bank, then it will pay depositors directly. So if you have an account at a failed bank, the FDIC would cut you a check for the value of your insured deposits.

What Is FDIC Insurance?

FDIC insurance is the means by which the Federal Deposit Insurance Corporation protects your accounts if your bank fails. The standard insurance amount is $250,000 per depositor, per account ownership type, per financial institution.

Consumers don’t have to do anything to take advantage of this coverage. If you have deposits at an FDIC member bank, you’re automatically covered. Banks and financial institutions pay a premium to the FDIC for this coverage, but consumers pay nothing.

If your bank fails, your deposits are covered on a dollar-for-dollar basis, including the principal and interest accrued through the date of default. So if your principal deposits total $200,000 and your accrued interest is $10,000, the full $210,000 would be covered.

What Does the FDIC Cover?

FDIC deposit insurance covers deposit accounts at member banks. That includes both individual and joint accounts as well as certain specialty accounts. The full list of accounts covered by the FDIC includes:

  • Checking accounts
  • Savings accounts
  • Money market accounts
  • CD accounts
  • Prepaid accounts, assuming certain requirements are met
  • Self-directed retirement accounts, including IRAs
  • Revocable and irrevocable trust accounts established at a bank
  • Bank-held employee benefit plans that are not self-directed
  • Corporation, partnership and unincorporated association accounts
  • Deposit accounts owned by government entities

Financial products that are not insured by the FDIC include annuities, mutual funds, stocks and bonds. Government, municipal and U.S. Treasury securities are also excluded.

FDIC Facts

The FDIC is hard at work protecting your money behind the scenes, and you may not even think about its role in your financial life. But if you’re interested in knowing more about the FDIC, here are four key facts about this important organization.

1. The FDIC Has Been Protecting Deposits Since 1933

The FDIC was created in 1933 to help foster more trust between consumers and financial institutions. In the aftermath of the stock market crash of 1929, thousands of banks failed. Fueled by fear of losing their money, bank customers rushed to withdraw their funds from banks. This led President Franklin D. Roosevelt to declare a four-day bank holiday in March 1933. In June of that year, President Roosevelt signed into law the Banking Act of 1933, which created the FDIC.

Designed to instill confidence in the American banking system, the FDIC proudly proclaims on its website that no depositor “has ever lost a penny of insured deposits since the FDIC was created in 1933.”

2. The FDIC Protects You Against Bank Failure

The FDIC launches into action when an insured financial institution fails. When a bank becomes insolvent founders and is unable to repay its customers’ deposits, the FDIC does a few things. Its first action is to notify the customers and the public of the bank’s closure. Then, it makes sure depositors are protected up to the insurance limits. It does this in one of two ways.

In most cases, the FDIC works with a healthy bank to assume the insured deposits of the failed financial institution. If this option isn’t available, the FDIC will pay depositors directly.

The FDIC does not protect depositors against loss from cybercrime or other types of fraud. The banks themselves are responsible for insuring against such losses, both physically at the bank and on the internet.

3. The $250,000 Coverage Maximum Can Apply More Than Once

As stated by the FDIC, the standard insurance amount in the event of bank failure is $250,000 per depositor, per insured bank, for each account ownership category.

The meanings of “per depositor” and “per insured bank” are straightforward enough. Once again, the deposit account ownership categories include:

The $250,000 coverage maximum can apply in different ways. For example, if you have a checking account, a savings account and multiple CDs at one bank, all of which are owned by you as an individual, then they are insured for a combined total of up to $250,000 because they all fall within one ownership category as single accounts.

However, if you also have a joint account with your spouse at the same bank, you’d receive another $250,000 coverage limit for half of the funds in that account.

Another way to receive more than $250,000 in coverage is to have deposit accounts with multiple FDIC-insured banks. Your accounts would each be covered up to the insurance limit per depositor for each ownership category at each bank.

Whenever you have more than $250,000 on deposit at a given FDIC-insured bank, remember that the additional money is at risk.

4. The FDIC Provides Educational Resources

In addition to protecting your deposits and contributing to the overall safety of the U.S. banking system, the FDIC offers various educational resources for consumers. Whether you’ve suffered a bank failure or you’re curious to learn more about how your money works, the FDIC can help.

  • To confirm that your bank is one of the more than 5,100 FDIC-insured institutions in the U.S., visit BankFind.
  • The Electronic Deposit Insurance Estimator, or EDIE, can help you calculate the coverage that applies to your deposits. You can simulate different scenarios to ensure you’re maximizing the protection afforded by the FDIC.
  • With consumer protection as its goal, the FDIC’s consumer assistance and information area provides links to government and nonprofit resources on topics ranging from basic personal finance to cybersecurity to credit reports.

The FDIC’s website also can satisfy your curiosity about banks that have failed and offer you the contact info you need to submit a complaint or learn more.

For U.S. history buffs, there’s even a timeline of major banking events from the 1700s to today.

Bottom Line

When it comes to banking, you may be primarily concerned with getting the best rates on savings accounts or finding a checking account with minimal fees. But it’s important to remember that the FDIC is there to protect you and your deposits in the rare event of a bank failure.

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Frequently Asked Questions (FAQs)

How much does the FDIC insure?

The standard FDIC insurance coverage limit is $250,000 per depositor, per account ownership type, per financial institution. Deposits held at one bank are insured separately from deposits held at another bank.

What is the FDIC limit on joint accounts?

Each co-owner of a joint account has up to $250,000 of FDIC insurance. So a couple that owns a joint account would have total coverage of $500,000. Individual FDIC coverage limits would apply to accounts each spouse or partner holds separately.

Are credit unions FDIC insured?

Credit unions are not FDIC insured. Instead, accounts held at member credit unions are insured by the National Credit Union Administration (NCUA). The NCUA applies the same coverage limits that the FDIC uses.

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