What exactly is an FDIC-insured account?

A bank or thrift account guaranteed by the Federal Deposit Insurance Corporation (FDIC), an independent federal agency that protects consumer money in bank failures Qualified accounts can hold up to $250,000 per depositor, FDIC-insured bank, and ownership type.

Understanding FDIC-Insured Savings Accounts

In the event of a bank failure, the FDIC will compensate you for losses of up to $250,000. Individuals with accounts over $250,000 may need to split them across numerous FDIC-insured institutions.

Knowing how and why the FDIC operates requires knowledge of the current savings and loan system. Modern bank accounts do not store depositor funds in vault drawers until withdrawal. Banks use depositor funds to issue new loans to earn interest.

The federal government mandates most banks to hold 10% of deposits on hand, leaving 90% for lending. Thus, your bank can use $900 of your $1,000 deposit to fund a vehicle loan or mortgage.

This is called “fractional reserve banking,” since the bank reserves just a tiny portion of deposits. Fractional reserve banking boosts capital market liquidity and lowers interest rates, but it can also make banks unstable.

Customers may seek more than 10% of their money back at once from the bank. A “bank run,” where too many depositors demand their money, forces the bank to turn away specific clients. Other depositors may lose hope and want their money back, afraid they won’t recover their savings. This can cause systemic bank panics by spreading to other banks.

Requirements for FDIC-Insured Accounts

The FDIC insures depositors if an FDIC-insured bank cannot satisfy deposit commitments. Upon “failing,” the FDIC sells the bank’s assets and pays off its debts. Account holders receive their cash returned relatively promptly, up to the protected amount, if a bank collapses. To recover extra deposits, they must wait until the FDIC sells the bank’s assets.

An eligible account must be in an FDIC-insured bank. Participating banks must post an official sign at each deposit-taking window or station. Depositors can check FDIC.gov for bank membership.

The FDIC covers all demand-deposit accounts that become bank liabilities. Negotiable orders of withdrawal (NOW), checking, savings, money market, and CD accounts are FDIC-insured. National Credit Union Administration members can cover credit union accounts up to $250,000.

Safe deposit boxes, investment accounts (stocks, bonds, etc.), mutual funds, and life insurance are not FDIC-insured. IRAs and revocable trusts are insured up to $250,000, but each qualifying beneficiary is covered.

Examples of FDIC-insured accounts

FDIC insures up to $250,000 per account per individual. In joint accounts, each co-owner gets $250,000 protection. With $500,000 on deposit, a couple or partners with a joint statement would be safeguarded, among other perks.

If a person has two $300,000 bank accounts under the same account holder, $50,000 of their insured savings are unsafe.

Deposit limitations vary per bank, even for the same owner. Say someone owns $200,000 at Bank A and $150,000 at Bank B. If both banks are FDIC-insured, their deposits surpass $250,000 and are entirely covered.

Since their entire deposit at Bank A is $350,000, this client loses coverage on $100,000 if they move $150,000. Savers may focus on getting the highest savings account interest rate instead of worrying about their money’s safety with deposit insurance.

FDIC-Insured Account History

The Banking Act of 1933 established the FDIC after over 10,000 U.S. banks failed or suspended operations in four years. A run on the bank, which ran out of funds to fulfill depositors’ withdrawal requests and left many families without their savings, was the leading cause of bank closures.

The FDIC aimed to reassure worried Americans after the 1929 Stock Market Crash and the Great Depression. In theory, the FDIC prevents banking panics. The FDIC “insures,” or guarantees, all bank demand deposits up to a particular amount; that number has expanded continually since its founding.

Before 2006, the BIF and SAIF funded the FDIC. The FDIC paid member banks insurance premiums to store and protect their cash.

The rival funds were merged under President Bush’s 2005 Federal Deposit Insurance Reform Act. The Deposit Insurance Fund (DIF) covers all FDIC-insured deposits, as all premiums remain.

Special Considerations

At times, the FDIC reserve fund is more than 99% short of its insurance exposure. Congress allowed the FDIC to borrow up to $500 billion from the Treasury, backing it with Federal Reserve funds. Thus, if the FDIC exhausts its alternatives, the government will provide more funding.

The FDIC can borrow short-term loans from the Treasury. The 1991 savings and loan (S&L) crisis caused the FDIC to borrow billions to cover failing thrift deposits.

FDIC-Insured Account Pros and Cons

The FDIC claims that since January 1, 1934, no depositor has lost protected funds due to a bank collapse. The FDIC has prevented bank panics for 80 years, a testament to its effectiveness.

Not everyone likes the FDIC. Detractors say mandated deposit insurance causes moral hazard and encourages riskier conduct by depositors and banks. They say clients don’t need to worry about which bank provides safer loans since the FDIC will bail them out.

Why is an FDIC-insured bank account critical?

The FDIC-insured deposit account’s deposit insurance guarantees up to $250,000 ($500,000 for a joint statement) for each account ownership type in case of a bank collapse, which is its most significant advantage.

Which Three Items Are Not FDIC-Insured?

Stock, bond, and mutual fund investments are the FDIC’s greatest exclusions. FDIC deposit insurance does not cover life insurance, annuities, municipal securities, safe deposit boxes, U.S. Treasury bills, bonds, notes, or crypto assets.

Is One Bank Good for All Your Money?

Money at one bank might be safe, but it’s risky. In the case of a bank failure, FDIC deposit insurance won’t cover account balances beyond $250,000 (or $500,000 for a combined account). In this case, you should store some cash at another bank.

To sum up,

Bank collapses are rare, yet they occur. From 2001 to 2022, 561 banks collapsed, including four in 2020 at the start of the epidemic. Your deposited funds are protected in an FDIC-insured account if your bank fails.

Conclusion

• Deposits in an FDIC-insured bank account are safeguarded from bank collapse or theft.
• Member banks pay quarterly premiums to the FDIC to cover claims.
• The maximum insurable amount is $250,000 per depositor, per bank.