Deposit accounts

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Federal Deposit Insurance Corporation

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.

History

Inception

The 19th century economy of the United States was characterized by occasional bank panics, with corresponding economic downturns and unemployment. After the particularly severe Panic of 1893, legislators sought to arrange better security for bank deposits. William Jennings Bryan, for example, proposed a national bank guarantee fund for use during bank runs. Although deposit security measures were adopted over time at the state level, the federal government chose a "lender of last resort" approach in the 1913 foundation of the Federal Reserve System.

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.

S&L and bank crisis of the 1980s

Federal deposit insurance received its first large-scale test in the late 1980s and early 1990s during the savings and loan crisis (which also affected commercial banks).

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.

FDIC funds

Former Funds

There were two separate FDIC funds; one was the Bank Insurance Fund (BIF), and the other was the Savings Association Insurance Fund (SAIF). The latter was established after the savings & loans crisis of the 1980s. The existence of two separate funds for the same purpose led to banks attempting to shift from one fund to another, depending on the benefits each could provide. In the 1990s, SAIF premiums were at one point five times higher than BIF premiums; several banks attempted to qualify for the BIF, with some merging with institutions qualified for the BIF to avoid the higher premiums of the SAIF. This drove up the BIF premiums as well, resulting in a situation where both funds were charging higher premiums than necessary.

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".

Deposit Insurance Fund

In February, 2006, President George W. Bush signed into law The Federal Deposit Insurance Reform Act of 2005. The FDIRA contains technical and conforming changes to implement deposit insurance reform, as well as a number of study and survey requirements. Among the highlights of this law was merging the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) into a new fund, the Deposit Insurance Fund (DIF). This change was made effective March 31, 2006. The FDIC maintains the DIF by assessing depository institutions an insurance premium. The amount each institution is assessed is based both on the balance of insured deposits as well as on the degree of risk the institution poses to the insurance fund.

FDIC exposure to insured deposits and DIF reserve ratios

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.

Insurance requirements

To receive this benefit, member banks must follow certain liquidity and reserve requirements. Banks are classified in five groups according to their risk-based capital ratio:

Well capitalized: 10% or higher
Adequately capitalized: 8% or higher
Undercapitalized: less than 8%
Significantly undercapitalized: less than 6%
Critically undercapitalized: less than 2%

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.

Resolution of insolvent banks

The two most common methods employed by FDIC in cases of insolvency or illiquidity are:

Purchase and Assumption Method (P&A), in which all deposits (liabilities) are assumed by an open bank, which also purchases some or all of the failed bank's loans (assets). There are several types of P&As: the Basic P&A: assets that pass to acquirers generally are limited to cash and cash equivalents. The Loan Purchase P&A: the winning bidder assumes a small portion of the loan portfolio, sometimes only the installment loans, in addition to the cash and cash equivalents. The Modified P&As: the winning bidder purchases the cash and cash equivalents, the installment loans, and all or a portion of the mortgage loan portfolio. The P&As with Put Options: to induce an acquirer to purchase additional assets, the FDIC offered a “put” option on certain assets that were transferred. The Whole Bank P&As: Bidders were asked to bid on all assets of the failed institution on an “as is,” discounted basis (with no guarantees). This type of sale was beneficial to the FDIC for three reasons. First, loan customers continued to be served locally by the acquiring institution. Second, the whole bank P&A minimized the one-time FDIC cash outlay, and the FDIC had no further financial obligation to the acquirer. Finally, a whole bank transaction reduced the amount of assets held by the FDIC for liquidation. The Loss Sharing P&As: these use the basic P&A structure except for the provision regarding transferred assets. Instead of selling some or all of the assets to the acquirer at a discounted price, the FDIC agrees to share in future loss experienced by the acquirer on a fixed pool of assets.

Payoff Method, in which insured deposits are paid by the FDIC, which attempts to recover its payments by liquidating the receivership estate of the failed bank. These are straight deposit payoffs and are only executed if the FDIC doesn’t receive a bid for a P&A transaction or for an insured deposit transfer transaction. In a straight deposit payoff, no liabilities are assumed and no assets are purchased by another institution. Also, the FDIC determines the insured amount for each depositor and pays that amount to him or her. In calculating each customer’s total deposit amount, the FDIC includes all the interest accrued up to the date of failure under the contractual terms of the depositor’s account.

FDIC insured items

FDIC insurance covers deposit accounts, which for the purposes of FDIC insurance are:

Demand deposit accounts (aka "checking accounts"), Negotiable Order of Withdrawal accounts, i.e., NOW accounts (checking accounts that earn interest), and money market deposit accounts, also called MMDAs (savings accounts that allow a limited number of checks to be written each month.)
Savings accounts that can be added to or withdrawn from at any time.
"Money market" accounts, essentially high-interest savings accounts (the name is similar to "money market funds" which are not insured).
Certificates of deposit (CDs), which generally require funds be kept in the account for a set period.
Outstanding Cashier's Checks, Interest Checks, and other negotiable instruments drawn on the accounts 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.

Items not insured by FDIC

Only the above types of accounts are insured. Some types of uninsured products, even if purchased through a covered financial institution, are:

Stocks, bonds, mutual funds, and money market funds

The Securities Investor Protection Corporation, a separate institution chartered by Congress, provides protection against the loss of many types of such securities in the event of a brokerage failure, but not against losses on the investments.
Further, as of September 19, 2008, the US Treasury is offering an optional insurance program for money market funds, which guarantees the value of the assets.

Investments backed by the U.S. government, such as US Treasury securities
The contents of safe deposit boxes.
:Even though the word deposit appears in the name, under federal law a safe deposit box is not a deposit account – it's a well-secured storage space rented by an institution to a customer.
Losses due to theft or fraud at the institution.
:These situations are often covered by special insurance policies that banking institutions buy from private insurance companies.
Accounting errors.
:In these situations, there may be remedies for consumers under state contract law, the Uniform Commercial Code, and some federal regulations, depending on the type of transaction.
Insurance and annuity products, such as life, auto and homeowner's insurance.