The Federal Deposit Insurance Corporation (FDIC) is a Government-owned companies in the United States created by the Glass-Steagall Act of 1933. It provides deposit insurance which guarantees the safety of checking and savings deposits in member banks, currently up to $250,000 per depositor per bank. The vast number of bank failures in the Great Depression spurred the United States Congress to create an institution to guarantee deposits held by commercial banks, inspired by the Commonwealth of Massachusetts and its Depositors Insurance Fund (DIF).
The FDIC insures accounts at different banks separately. For example, a person with accounts at two separate banks (not merely branches of the same bank) can keep $250,000 in each account and be insured for the total of $500,000. Also, accounts in different ownerships (such as beneficial ownership, trusts, and joint accounts) are considered separately for the $250,000 insurance limit. Under the Federal Deposit Insurance Reform Act of 2005, Individual Retirement Accounts are insured to $250,000.
This combined state-federal system failed to prevent a bank panic in 1933, at the end of Herbert Hoover's term as president. The panic saw 4,004 banks closed, with an average of $900,000 in deposits. Under the federal government's supervision, these banks were merged into stronger banks. Many months later, depositors received compensation for roughly 85% of their former deposits. Incoming President Franklin D. Roosevelt, a former banker himself, did not like the insurance approach, but he agreed to it to restore confidence in the banking system.
In May 1933, the U.S. House Banking and Currency Committee submitted a bill that would insure deposits 100 percent to $10,000, and after that on a sliding scale; it would be financed by a small assessment on the banks. However the U.S. Senate Banking Committee reported a bill that excluded banks that were not members of the Federal Reserve System. Senator Arthur Vandenberg rejected both bills because neither contained a ceiling on the guarantees. He proposed an amendment covering all banks, beginning by using a temporary fund and a $2,500 ceiling. It was passed as the Glass-Steagall Deposit Insurance Act in June 1933 with Steagall's amendment that the program would be managed by the new Federal Deposit Insurance Corporation. The act established the FDIC as a temporary government corporation and gave the FDIC the authority to regulate and supervise state non-member banks; it extended federal oversight to all commercial banks for the first time, and prohibited banks from paying interest on checking accounts. The act funded the FDIC with $289 million in initial loans from the United States Treasury and the Federal Reserve, loans which the FDIC repaid in 1948.
The bill was not supported by banks: Francis Sisson, then-president of the American Bankers Association, said that concept of banks paying into a fund that would insure individual banks against losses was "unsound, unscientific, unjust, and dangerous.
Led by Chicago banker Walter J. Cummings, Sr., the FDIC soon included almost all the country's 19,000 banking offices. Insurance started January 1, 1934. President Franklin D. Roosevelt was personally opposed to insurance because he thought it would protect irresponsible bankers, but yielded when he saw Congressional support was overwhelming. In early 1934, Roosevelt appointed Leo Crowley, a Wisconsin banker, as the second head of FDIC. Crowley, Roosevelt soon learned, did not have an unblemished record as a banker in Wisconsin. After some anguish, Roosevelt kept Crowley on and ignored his detractors. The outstanding public service of Leo Crowley was not generally known until 1996.
The Banking Act of 1935 established the FDIC as a permanent agency of the government and provided for deposit insurance up to $5,000. The Federal Deposit Insurance Act of 1950 increased the insurance limit to $10,000, gave the FDIC the authority to lend to any insured bank in danger of closing if the operation of the bank is essential to the local community, and authorized the FDIC to examine national and state member banks for their insurance risk.
The FDIC deposit insurance limit was increased to $15,000 in 1966, and in 1969, to $20,000. In 1974, Congress increased the limit to $40,000. A deposit insurance limit of $100,000 was enacted in 1980 by the Depository Institutions Deregulation and Monetary Control Act of 1980. On October 3, 2008, the deposit insurance was temporarily raised to $250,000 per depositor through December 31, 2009.
The brunt of the crisis fell upon a parallel institution, the Federal Savings and Loan Insurance Corporation (FSLIC), created to insure savings and loan institutions (S&Ls, also called thrifts). Due to a confluence of events, much of the S&L industry was insolvent, and many large banks were in trouble as well. The FSLIC became insolvent and merged into the FDIC. Thrifts are now overseen by the Office of Thrift Supervision, an agency that works closely with the FDIC and the Comptroller of the Currency. (Credit unions are insured by the National Credit Union Administration.) The primary legislative responses to the crisis were the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), and Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).
This crisis cost taxpayers an estimated $150 billion to resolve.
Then Chairman of the Federal Reserve Alan Greenspan was a critic of the system, saying that "We are, in effect, attempting to use government to enforce two different prices for the same item namely, government-mandated deposit insurance. Such price differences only create efforts by market participants to arbitrage the difference." Greenspan proposed "to end this game and merge SAIF and BIF".
A March 2008 memorandum to the FDIC Board of Directors shows a 2007 year-end Deposit Insurance Fund balance of about $52.4 billion, which represented a reserve ratio of 1.22% of its exposure to insured deposits totaling about $4.29 trillion. The 2008 year-end insured deposits were projected to reach about $4.42 trillion with the reserve growing to $55.2 billion, a ratio of 1.25%.
As of September 2008, the DIF had a balance of $45 billion. Bank failures typically represent a cost to the DIF because FDIC, as receiver of the failed institution, must liquidate assets that have declined substantially in value while at the same time making good on the institution's deposit obligations. In July 2008, IndyMac Bank failed and was placed into receivership. The failure was initially projected by the FDIC to cost the DIF between $4 billion and $8 billion, but shortly thereafter the FDIC revised its estimate upward to $8.9 billion. Due to the failures of IndyMac and other banks, the DIF fell in the second quarter of 2008 to $45.2 billion.. The decline in the insurance fund's balance caused the reserve ratio (fund's balance divided by the insured deposits) to fall to 1.01 percent as at 30 June 2008, down from 1.19 percent in the prior quarter. Once the ratio falls below below 1.15 percent, FDIC is required to develop a restoration plan to replenish the fund, which is expected to involve requiring higher contributions from banks which deal in riskier activities.
When a bank becomes undercapitalized the FDIC issues a warning to the bank. When the number drops below 6% the FDIC can change management and force the bank to take other corrective action. When the bank becomes critically undercapitalized the FDIC declares the bank insolvent and can take over management of the bank.
Accounts at different banks are insured separately. All branches of a bank are considered to form a single bank. Also, an Internet bank that is part of a brick and mortar bank is not considered to be a separate bank, even if the name differs. FDIC publishes a guide entitled Your Insured Deposits setting forth the general contours of FDIC deposit insurance, and addressing common questions asked by bank customers about deposit insurance.
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