Economy

What is the FDIC, and What Does it Do?

FDIC logo on their Washington DC headquarters
Credit: JHVEPhoto - stock.adobe.com

The FDIC has made headlines in recent bank-related news, but what is it and what does it do?

What is the FDIC?

Have you ever opened a bank account in the United States? If so, chances are that you are insured by the FDIC. The FDIC stands for the Federal Deposit Insurance Corporation. It is a United States government corporation that supplies insurance to people who deposit their money in American commercial and savings banks. The FDIC also examines and supervises select financial institutions to make sure they operate safely and rationally with their deposits, ensure consumer protection through various functions, and manage outcomes of failed banks. As of December 2022, the FDIC insured 4,706 commercial and savings banks and supervised 3,032 financial institutions.

When was the FDIC created?

The FDIC was created by the Banking Act of 1933 as the Great Depression of the 1930s was ongoing, during which many banks failed and many Americans lost their much-needed deposits. The Banking Act was enacted to restore trust in the American banking system after more than 9,000 banks failed in the years prior to the FDIC’s creation, taking with them approximately $7 billion in depositors' assets. 

Since its start in 1933, the FDIC has stated that “no depositor has ever lost a penny of FDIC-insured funds.”

How much money does the FDIC insure? Where does the money come from?

The FDIC has insured an increasing amount of deposits ever since it was first created. In 2010, The Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted after the 2008 Financial Crisis, insuring deposits in member banks up to $250,000. This means that in the event that a member bank fails (i.e. the bank no longer meets requirements to remain in business as set by their regulating authority), the FDIC will insure all depositors up to $250,000.

The FDIC is primarily supported by member banks’ insurance dues and sometimes supported by proceeds from bank liquidations. It is not supported by public funds. If insurance dues and liquidation proceeds are insufficient, the FDIC can borrow money from the federal government or issue debt through the Federal Financing Bank.

Why is this relevant?

On March 10, 2023, Silicon Valley Bank (SVB) failed after a “bank run,” which is when many depositors begin to withdraw their money simultaneously out of fear that a bank will collapse. SVB did not have enough money for all these depositors to withdraw at once, causing the largest bank failure since the 2008 financial crisis and second-largest bank failure in American history. This collapse affected many startups who had large sums of money deposited in the bank but were not able to withdraw money. Many large companies were also affected, most notably in the tech and media industries.

SVB was seized by the California Department of Financial Protection and Innovation (DFPI) and was placed under the receivership of the FDIC. More than 93% of deposits at SVB exceeded the maximum amount insured by the FDIC (~$172 billion); the FDIC received permission from the Treasury (a systemic risk exception) to transfer the deposits into a newly created FDIC-operated ‘bridge bank’ and announced that all depositors of SVB would be made whole.

Conclusion

The FDIC was created to restore faith in the U.S. bank system and plays an important role in economic markets. The SVB saga highlights the importance of an insurance entity that supervises and manages banks, especially amid economic downturns and bank crises. For most Americans, the FDIC makes it possible for most, if not all, deposits in commercial or savings banks to be insured. Because of this, we can continue to trust that the money we put into the banking system will be safe or recovered.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.