The USA government based conglomerate Federal Deposit Insurance Corporation also abbreviated as FDIC is a deposit insurance supplier to commercial and savings bank in America. Now, what are deposit insurance? Deposit insurance is the government’s guarantee that an account holder’s money at an insured bank is safe up to a certain amount, currently $250,000 per account.[1] Let’s learn mor with the help of this article.
“Deposit insurance, created during the Great Depression in 1933, has sharply reduced the frequency of bank runs that once were common in the U.S. As former Federal Reserve Chair Ben Bernanke explained in his 2022 Nobel Prize speech, about 40% of all U.S. banks disappeared between 1929 and 1933: “They failed, closed, or were absorbed by other banks. That happened because there were massive runs, bank runs, where people lost confidence in the banks and pulled out their money…The ones that were closed couldn’t make loans, obviously, and the ones that survived became extremely cautious being very reluctant to make loans.”[2]
The FDIC was borne out of the great depression to restore the overall banking system in the country. The Banking Act 1933 governs FDIC and has also been responsible to change the insurance limit over the years. In addition to this, there was another enactment that assigned more responsibilities on FDIC was the emergence of the enactment Dodd-Frank Wall Street Reform and Consumer Protection Act during the financial crisis of 2007-2008. The FDIC covers checking and savings accounts, certificates of deposit (CDs), money market accounts, IRAs, revocable and irrevocable trust accounts, and employee benefit plans.[3] However, Mutual funds, annuities, life insurance policies, stocks, and bonds aren’t covered by the FDIC.[4]
Let us make the concept of FDIC simpler with the help of an example: So, during the great depression there was a threat that banks would force shut down, as such some American citizens decided to withdraw their savings from their respective banks. However, as the threat grew, majority panicked depositors tried to do the same, which in due course caused almost many banks incapable of assisting customers in withdrawal requests.
It’s important to note that, prior to the establishment of FDIC, there were no assurance that your deposits will be safe in banks. One had to generally depend on the bank’s reputation and trust it’s stability. Besides, there have been various additional regulatory framework enacted by the United States government to prevent bank-run and ensures that problems are tackled at the root level.
What is bank-run or run on the bank?
This phenomenon usually occurs when stampeded of financial institutions clients withdraw their money fearing on bank’s possibility to run out of money. It is interesting to note that, these happenings occur due to mere panic in the mind of American citizen’s and doesn’t actual mean that the bank is going insolvent. However, run on the bank do have the ability to turn a bank bankrupt even if it initially wasn’t.
[1] How does deposit insurance work? (brookings.edu) [2] Ibid. [3] Federal Deposit Insurance Corp. (FDIC): Definition & Limits (investopedia.com) [4] Ibid.
