Federal Deposit Insurance Corporation

Banking Terms -> Federal Deposit Insurance Corporation

• FDIC is a US state corporation established under the Glass–Steagall Act in 1933. The FDIC guarantees the security of citizens’ deposits in banks. At the present, the amount of $250,000 per account per bank is guaranteed and given back to the holder if the institution goes bankrupt. This law is extended only to banks that are members of the corporation. The law, which was passed in 1933, was a measure to counteract and prevent further incidences like the consequences of the Great Depression, when all people who had savings in banks lost them irrevocably.
  
  At present the Federal Deposit Insurance Corporation insures deposits at almost 8,000 institutions across the United States. No depositor has lost any funds due to bank insolvency since 1934, a fact the United States as a developed country is very proud of. It is not difficult to check whether certain financial institution is a member. Banks post emblems in each branch to affirm their FDIC membership.
  
  The Board of Directors has five members, three of whom are appointed by the US President with the agreement of the Senate. Their term of office is six years per person. No more than 3 members can be elected from one political party.
  
  Under the Banking Act of 1933, signed by President Roosevelt, the Federal Deposit Insurance Corporation was set up as a temporary government corporation, given the right to offer deposit insurance to banks, to monitor and control non-member banks, to establish a dividing line between investment and commercial banking, to ban financial institutions from paying interest on clients’ checking accounts, and to permit them to open branches nationwide if separate state laws allow it.
  
  The first major challenge that faced the Federal Deposit Insurance Corporation occurred in the late 80s and early 90s. At this time, there was a loan crisis in the United States, which also affected savings and commercial banks. Among the preventive measures taken was the 1989 Financial Institutions Reform, Recovery and Enforcement Act and other acts. It cost taxpayers around $150 billion to combat this crisis successfully. The next big challenge was the recent global downturn. 25 banks went under in 2008 and were taken over by the FDIC. In mid-2009, the corporation implemented what is known as a legacy loan program. The aim of this program is for banks to get rid of liabilities in order to increase lending and raise new capital.
  
  The most recent development is that 157 banks with around $92 billion in assets in the US have become insolvent. FDIC maintains a failed bank list which is regularly updated. The list includes a number of banks, among which the Mountain Heritage Bank, Atlantic Southern Bank, First Georgia Banking Company, United Western Bank, and many others.
  
  The Federal Deposit Insurance Corporation is funded by member banks, and they have to meet certain reserve and liquidity requirements. Examiners visit member banks on a regular basis to make sure that they follow the established guidelines. In case a bank is unable to comply with the guidelines, the corporation issues a warning. However, if the problems cannot be resolved, the Federal Deposit Insurance Corporation can force the institution to take certain corrective actions, like changing the management. Although this has happened on just a few occasions, FDIC can take measures that result in a bank’s closure. The reason is that FDIC works to maintain confidence in the banking sector. This objective is mainly attained by offering insurance to depositors and taking various measures to minimize the risk of bank failure.

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